Hello CCIians,
I have a doubt in M&A chapter of SFM practice manual. My doubt is with regard to Qstn.no.38 (Pg.no.13.58, Jan'16 Edn. I wanna know how the 'Beta Equity' is calculated and the logic behind the calculation as I'm unable to figure it out.
Your help in this regard will be highly useful for me. Thanks in advance
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SFM Practice manual-Mergers & Acquisitions-Doubt
Replies (2)
Beta of firm = Beta of equity * Equity/((E+D(1-t)) + Beta of debt * Debt(1-t)/((E+D(1-t))
You ar egiven Beta of equity and beta of debt --> you will get firm beta
Industry beta is same for both the company Beta of proxy firm = beta of ABC
By reverse computation and changing debt equity ratio you can get equity beta for ABC
since KLM is under ABC's management hence same debt equity ration of ABC will be used for KLM
Thanku Sandeep !! Now I understand the formula as well as the logic. Worked out the beta calculation using the method u explained above and got the answer. Cheers
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