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ungearing a beta

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › ungearing a beta

  • This topic has 0 replies, 1 voice, and was last updated 8 months ago by Eliza539.
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  • October 29, 2024 at 12:29 pm #712907
    Eliza539
    Participant
    • Topics: 5
    • Replies: 2
    • ☆

    Hi John,

    I am stuck on the question below

    “Stetson Plc is a passenger airline which has a debt: equity ratio of 1:1. It wishes to expand into air freight and has identified that the beta of a highly geared parcel delivery company has a beta of 1.8 and Ke of 18.4% – these are influenced by its gearing of 2:1 debt to equity. Assume that debt has a beta of zero”

    Calculate the Cost of capital that Stetson should use to appraise this investment by ungearing and regearing the beta.

    Ungearing the beta
    The answer in the workbook gives ba = 1.8 (1/24) = 0.75

    Can you explain where they got the 1/24 from please?

    Thanks
    Eliza

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