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11 11 13 Review Session 6 _question 14.19_

11 11 13 Review Session 6 _question 14.19_ - that Enteprise...

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Finance for non-MBAs: Question 14.19 Pablo Villanueva. November 13, 2011 1 Question 14.19. During the Review Session of November 11th, 2011, there were some doubts on question 14.19. Here is the answer: The asset beta of a firm will not depend on the capital structure under perfect capital markets. Therefore β Before u = β After u . We know that the asset beta relates to equity and debt beta in the following equation: beta u = E E + D β E + D E + D β d (1) Note that in this equation D refers to Net Debt. That is, D = GrossDebt - Cash . Since we know
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Unformatted text preview: that Enteprise Value=Equity+Debt-Cash, then we can write the above equation as: beta u = E EV β E + D EV β d (2) Since in this case β d = 0 and since β Before u = β After u and EV Before = EV After by Modigliani-Miller, then: E Before β Before E = E After β After E The question asks for the beta of equity after the capital structure change so: E Before β Before E E After = E After β After E (3) Then, 120 * 1 . 50 120-40 = β After E (4) 1...
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