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Hi John,
Q1 of pilot paper states:
“Tramont Co’s quoted beta is 1.17…………it is estimated that the beta applicable to the project if it is all-equity financed will be 0.4 more than the current all-equity financed beta of Tramont Co”.
The resolution considers that 1.17 is equity beta and that beta applicable for the project is asset beta. My thought was exactly the other way around.
Could you please explain how 1.17 is not asset beta and beta applicable for the project is not equity beta in this question
“Could you please explain how 1.17 is not asset beta and beta applicable for the project is not equity beta in this question?”
when they write equity beta its always the one which has finanical risk. When examiner says the “quoted beta” you need to see if it the company has any debt. If this is the case then its equity beta. When they say asset beta or all-equity financed beta it is asset beta because “all equity financed” means no debt right? and so when there is no debt no financial risk and therefore it is called asset beta. You can also analyze in relation to circumstances of scenario. Here you need to find the Base case NPV which is discounted using ungeared cost of equity so the beta you need is asset beta.
Hope this helps!
accalegend: If you want me to answer you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
Quoted betas are always the equity betas. As blazingfire has written, if there is no debt then this is also the asset beta. If there is gearing, then you need to use the asset beta formula to calculate the asset beta.Many thanks John for the explanation. Also well noted the need of using ask tutor forum to ask you questions.
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