00:01
So here we are being asked that what is no debt asset beta and what is no debt wacc.
00:07
So let's look at the first part of the question.
00:10
The a.
00:11
So the firm is entirely financed by equity and beta of equity.
00:16
And so you are financed by beta, beta of equity.
00:28
And that is given to us as 0 .80 and beta of debt will be.
00:37
The beta of debt is zero so therefore the beta of assets the beta of assets will also be 0 .80 now the beta on assets is weighted average of beta on debt so the beta debt and the beta on equity is given the formula that is found here so let's go through that we are going to have the beta of the assets to be equal to the beta on the debt, multiply by d over v plus the beta on the equity multiplied by a over v.
01:43
So from here our d is the amount, the d is the amount of our standing the amount.
02:01
Amount of outstanding debt then the amount of equity the amount equity the amount of equity and the v is the sum of the outstanding equity at their market value the v is the sum the v is the sum of outstanding equity at their market value at their market value okay so when we make the substitution we are going to get the beta of the assets to be equal to 0 multiplied by 0 plus 0 .8 multiplied by 1 so of course the answer with 0 .8 so therefore therefore the asset beta of the firm asset beta of the firm is giving the asset beta of the firm is giving as 0 .8 0 .8 okay now with the second part of the question we say that what is the no debt wacc so let's look at that so with the b part the firm do not have any debt so weighted average cost of capital and that is the wacc the weighted average cost of capital will be the same cost this one be the same cost of equity it will be the same cost of equity okay now they return on equity they return on equity return on equity which is r -o -e they return on equity is the rate of return that required by shareholders on the investment in a firm and so the roe can be calculated using the capital asset pricing model so it can be calculated using the capital using the capital assets pricing model capital assets capital assets price model okay so let's look at that and that is given by the formula that is given by the formula of the equity to be equal to rf plus rm minus r f multiplied by beta so here our our equities are required return on the equity so the r equity is a return required it is a required return on equity required return on equity then the rf is the risk free rates risk free rates then you have the rm which is rm minus rf this is the market this is the market market risk premium.
07:35
Market risk premium.
07:38
Then the beta is a beta coefficient...