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dear john,
how to calculate weighted average beta of the combined company,, mainly the weight for the beta,, sometimes it includes total debt and equity to calclulate asset avg beta and somtimes it only takes total equity to weight the individual asset beta and and once calculating the avg beta how to calculate equity beta,, do we calculated using regearing ?in kaplan book ,, they calculated as this , Asss
Anderson Co Debt = 50 Equity= 450 Asset beta= 1.25
Web co Debt = 20 Equity= 80 Asset beta= 1.60
making a cash offer of 80 m which is funded by debt &tax is 30 per1 ) !Combined asset beta= 1.25* 500/600 + 1.6 * 100/600=1.31
equity beta = 1.31* ( 1+ (.07* (150/530)))= 1.572) so how to calculate the average asset beta … if only equity was to be considered then it should be cal. as =1.25* 450/530+ 1.60*80/530 =1.30
equity beta wud be cal by regearing ,,,, 1.3 = Be * 530/(530+150*.7)=1.55
SO which is the correct way of calculating the weighted avg beta is ,it with Formula 1 or formula 2)The examiner is not consistent on this point. In some answers he has just used equity, but in other answer he has used equity plus debt.
The logic for using just equity is that it is equity that carries the risk.However, as with all questions in P4, there is never just one correct answer because it depends on assumptions. Just make sure you state your assumptions and that your workings are clear enough for the marker to follow, and you will still get the marks.
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