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For model answer in Tisa Co, Examiner has used the flowing steps to find the asset beta of the component.
1. Find Elfu Co portfolio asset beta
2. Find Elfu Co asset beta of other activitie,
3. Find component asset beta using weighting of 25% and 75%
4.Component equity Beta
5.Find KeI feel like there is short cut as flows
1. Find component Equity beta using weighting of 25% and 75%
2. Un-gear component Equity beta to find Asset beta of the component
3. Re-gear Asset beta of the component to find the equity beta of the component
4. Find KeHowever i have ended up different component equity beta of 1.850 and Ke of 14.23% compared to model answer of 1.879 and 14.4%
You cannot take your approach because the total equity beta is dependent on both the risk of the two components and the level of gearing.
Therefore we should always weight the Asset betas and not Equity Betas Right
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