In connection with the proposed leveraged buyout, Krager wants to measure The Apple House’s business risk without taking into account its leverage. She must: A) determine the asset beta. B) calculate the CAPM IRR. C) compare historical returns to the target IRR. Your answer: C was incorrect. The correct answer was A) determine the asset beta. The asset beta, or enterprise beta, is a measure of business risk that does not consider the capital structure. (Study Session 13, LOS 47.o) What is the Equity method than?
Well B and C really don’t make much sense if you think them through as those options don’t measure any type of risk.
Agree with Chuck… this must be a Qbank question…haha Its obviously A…sorry
What they are saying is to unlever the beta take the beta and divide it by the leverage ratio.
Yes exectly cpepin so wouldnt unlevering the beta take into account account its leverage. Yes its Q Bank hehe
The asset beta does not depend on leverage actually. If you notice the formula, asset beta remains constant and the right hand side, i.e. equity beta and debt beta (or equity return and debt return) are the ones which change. They changes always in such a way that asset beta remains constant. The reason why A is the answer though is because B and C are not the answers since they depend on leverage.
Thanks rpradeephere i didnt notice this