Beta

Question 1

What is the overall formula

Answer 1

Be = Ba(1+(Debt(1-Tax)/Equity)

Question 2

What are the four steps (Beta overview)

Answer 2

1: Un-gear the proxy beta
2: Re-gear the asset beta
3: Find new Ke using CAPM
4: Find WACC using new Ke

Question 3

Step 1 (Un-gearing the proxy beta) formula?

Answer 3

Proxy Beta = Ba * (1+(D(1-T)/E)

Question 4

Step 2 (Re-gearing Asset beta) Formula?

Answer 4

Be = Asset Beta(1+(Debt(1-Tax)/Equity)

Question 5

What does de-gearing and re-gearing the beta do to the cost of equity?

Answer 5

It reflects the systematic risk of the project.

Question 6

How do you calculate the overall equity beta?

Answer 6

Multiply the two equity beta’s by their respective % given by the question and then add the result together. Then calculate the CAPM Ke using that new Equity Beta and calculate the WACC.

Question 7

Do you de-gear using the proxy beta or the original company beta?

Answer 7

Proxy beta

Question 8

Do you de-gear using the proxy D:E ratio or the original D:E ratio?

Answer 8

Proxy

Question 9

Do you re-gear using the proxy beta or the new beta achieved

Answer 9

New beta achieved

Question 10

Do you re-gear using the proxy D:E ratio or the original D:E ratio?

Answer 10

Original

Question 11

When is ungear and regear beta relevant?

Answer 11

When systematic risk changes - Going to a different sector

Question 12

What two risks is equity beta made up of?

Answer 12

Business risk and financial risk

Question 13

What risk does ungearing/regearing remove/add?

Answer 13

It removes financial risk of proxy and adds the original company’s financial risk.

Question 14

When ungearing you go from Beta …. to Beta ….

Answer 14

Be to Ba

Question 15

What do i always forget?

Answer 15

To add the 1 into the ungearing and regearing beta calculations before doing the * or /