06-06-2012, 03:52 AM
Delta Cement and Mariana Foods Limited is considering to start a new project in textile industry. Both companies want to determine beta to estimate market risk of textile industry. Delta Cement has a current beta of 0.8 and wishes to maintain 100% equity based capital structure for the new project. Whereas Mariana Foods Limited has current beta of 2 and its proposed capital structure for textile industry is 30:70. Textile industry has systematic risk of 1.5 with debt to equity ratio of 30:70; assume tax rate is 35%.
Keeping into consideration “Pure play method”; you are required to:
Identify which company needs to un-gear its beta to enter in new industry? Give logical reasoning to support your answer.
Calculate beta of the company which needs to be un-gear and discuss how change in debt to equity ratio will affect equity beta (increase or decrease) and why?
Keeping into consideration “Pure play method”; you are required to:
Identify which company needs to un-gear its beta to enter in new industry? Give logical reasoning to support your answer.
Calculate beta of the company which needs to be un-gear and discuss how change in debt to equity ratio will affect equity beta (increase or decrease) and why?
[SIGPIC][/SIGPIC]