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- This topic has 9 replies, 3 voices, and was last updated 4 years ago by John Moffat.
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- May 20, 2016 at 6:11 pm #316104
Dear Sir,
In question Tisa Co, part a, It can be assumed that 80% of Elfu Co’s debt finance and 75% of Elfu Co’s equity finance can be attributed to other activities excluding the component production. In the solution:
1.217 = component asset beta x 0.25 + 1.078 x 0.75
Why dont we use debt finance ratio (80%) in above calculation?
Thanks,
DTMay 20, 2016 at 6:14 pm #316105Because it is equity that carries the risk 🙂
May 20, 2016 at 6:36 pm #316108Thanks John however i am still confused. Debt also carries the risk.
May 21, 2016 at 9:17 am #316154Debt only carries the risk of bankruptcy.
The risk we are normally concerned with is the potential fluctuations in the income stream. Dividends fluctuate, but debt interest is fixed interest and there carries zero risk (except, again, for the risk of bankruptcy in which case obviously there is no interest 🙂 )May 21, 2016 at 5:45 pm #316254thanks
May 22, 2016 at 6:11 am #316302You are welcome 🙂
November 29, 2019 at 4:06 pm #554162Dear Sir ,
In part c , what is 1/2 in 5^1/2
Its five year VAR calculationNovember 29, 2019 at 7:58 pm #554197You should be aware from school, that writing something to the power of 1/2 is another way of writing that is the square root of 5 (it is easier for them to type!! 🙂 )
As to why we take the square root is explained in my free lectures on VaR.
November 30, 2019 at 4:39 am #554213Oh so its the sqaure root… thankyou Sir ?
November 30, 2019 at 9:02 am #554222You are welcome 🙂
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