How is the equity capital column of schweser book 2 page 67 Figure 1 computed (LOS 22.c)? If there are 0% of pension assets in equities, how do we get 2.52Million$ in Equity Capital?
Can anyone please help me on this one?
I don’t have notes with me… But I think it’s something like: equity capital = (total asset beta)*(total asset)/(equity beta)
I don’t use Schweser, can you post the information? If you don’t have equity in the plan, then pension beta = 0 and operating asset beta equals (operating assets/total assets)*operating asset beta which becomes the total asset beta. Liability beta is 0, so equity can be derived by forcing total asset beta to equal the beta of liabilities plus equity.
Thank you guys. Deriv, your formula works! I can now know how to compute Equity Capital. Now, when a pension fund is fully funded, which is the case in the example, its assets equal its liabilities. --> There is no balance sheet equity Why does equity capital of the firm change when we change the allocation to equities of a fully funded pension? There is something I am not getting here…
as per deriv’s formula, equity capital increases when total asset beta increases. When you increase allocation of equities in your plan, the beta of the pension’s assets increase as well, since Beta Pension Assets = Weight Equity * Beta of Equity. your total asset beta = (weight pension assets / total assets)* Beta Pension Assets + (weight operating assets/ total assets) * Beta Operating assets, so since Beta Pension Assets increased, total asset beta increased which increases equity capital.