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,
DT
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Tisa Co (6/12)
10y ago#1Because it is equity that carries the risk :-)
Thanks John however i am still confused. Debt also carries the risk.
10y ago#3Debt 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 :-) )
thanks
10y ago#5You are welcome :-)
Dear Sir ,
In part c , what is 1/2 in 5^1/2
Its five year VAR calculation
6y ago#7You 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.
Oh so its the sqaure root... thankyou Sir ?
6y ago#9You are welcome :-)
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