Actuarial Outpost ASM IFM Exercise 7.26
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#1
09-23-2018, 04:11 PM
 eastla_student Member CAS SOA Non-Actuary Join Date: Jun 2017 Location: LA Studying for IFM Favorite beer: 805 Posts: 36
ASM IFM Exercise 7.26

I'm confused by a part of the answer for ASM IFM Exercise 7.26
For this problem, looking at the company Anthony's Best,

Equity is 5000 shares x \$120 = 600,000
Debt is 1,000,000
Cash is 1,200,000

We want to calculated unlevered beta for the company

In the answer, enterprise value E + D is calculated as 600,000+1,000,000-1,200,000 = 400,000

why is the second term (for debt beta) calculated this way?

D/(D+E) = 1,000,000 / 400,000

and not -200,000 / 400,000, where D = 1,000,000-1,200,000 = -200,000?
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P/1 FM/2 IFM
#2
09-23-2018, 05:13 PM
 Abraham Weishaus Member SOA AAA Join Date: Oct 2001 Posts: 7,220

Quote:
 Originally Posted by eastla_student I'm confused by a part of the answer for ASM IFM Exercise 7.26 For this problem, looking at the company Anthony's Best, Equity is 5000 shares x \$120 = 600,000 Debt is 1,000,000 Cash is 1,200,000 We want to calculated unlevered beta for the company In the answer, enterprise value E + D is calculated as 600,000+1,000,000-1,200,000 = 400,000 why is the second term (for debt beta) calculated this way? D/(D+E) = 1,000,000 / 400,000 and not -200,000 / 400,000, where D = 1,000,000-1,200,000 = -200,000?
The beta for cash is 0 and the beta for debt is nonzero, so they should not be combined. The proportion of debt is multiplied by a nonzero number and the proportion of cash is multiplied by 0. Since 0 times anything is 0, I didn't bother showing that term.
#3
09-23-2018, 05:57 PM
 eastla_student Member CAS SOA Non-Actuary Join Date: Jun 2017 Location: LA Studying for IFM Favorite beer: 805 Posts: 36

Thank you. That makes perfect sense now.
__________________
P/1 FM/2 IFM