“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?