Equity of KGF Ltd. (KGFL) is 410 Crores, its Debt, is worth 170 Crores. Printer Division segments value is attributable to 74%, which has an Asset…
CA Final · Advanced Financial Management · MTP · September 2025
Equity of KGF Ltd. (KGFL) is 410 Crores, its Debt, is worth 170 Crores. Printer Division segments value is attributable to 74%, which has an Asset Beta (β p ) of 1.45, balance value is applied on Spares and Consumables Division, which has an Asset Beta (β sc ) of 1.20 KGFL Debt beta (β D ) is 0.24. Required: Calculate Equity Beta (β E ) of KGFL,Assess Equity Beta (β E ), if KGF Ltd. decides to change its Debt Equity position by raising further debt and buying back of equity to have its Debt Equity Ratio at 1.90 [Debt/ (Debt + Equity)]. Assume that the present Debt Beta (β D1 ) is 0.35 and any further funds raised by way of Debt will have a Beta (β D2 ) of 0.40. Note: Round off calculations upto 3 decimal points.
Suggested Answer and Working Notes:
(i) Equity Beta To calculate Equity Beta first we shall calculate Weighted Average of Asset Beta as follows: = 1.45 x 0.74 + 1.20 x 0.26 = 1.073 + 0.312 = 1.385 Now we shall compute Equity Beta using the following formula: β asset = β Equity [E / (E + D(1-t))] + β Debt [D(1-t) / (E + D(1-t))] Accordingly, 1.385 = β Equity [410 / (410 + 170)] + β Debt [170 / (410 + 170)] 1.385 = β Equity [410 / 580] + 0.24 [170 / 580] β Equity = 1.86 (ii) Equity Beta on change in Capital Structure Amount of Debt to be raised: Particulars Value Total Value of Firm (Equity 410cr + Debt 170cr) 580 Cr Desired Debt Equity Ratio 1.90 : 1.00 Desired Debt Level = (Total Value x Debt Ratio) / (Debt Ratio + Equity Ratio) 380 Cr Less: Value of Existing Debt (170Cr) Value of Debt to be Raised 210 Cr Equity after Repurchase = Total value of Firm - Desired Debt Value = 580 Cr -380 Cr = 200 Cr Weighted Average Beta of KGFL: Source of Finance Investment (₹ Cr) Weight Beta Weighted Beta Equity 200 0.345 β E (= X) 0.345x Debt - 1 170 0.293 0.35 0.103 Debt - 2 210 0.362 0.40 0.145 580 Weighted Average Beta 0.248 + (0.345x) β KGFL = 0.248 + 0.345x 1.385 = 0.248 + 0.345x 0.345x = 1.385 – 0.248 X = 1.137/0.345 = 3.296 β KGFL = 3.296
Topics: Portfolio Management
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