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…

5. (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: ẞ Asset = ẞ Equity [E / (E + D(1 - t))] + ẞ Debt [D(1 - t) / (E + D(1 - t))] Accordingly, 1.385 = ẞ Equity [410 / (410 + 170)] + ẞ Debt [170 / (410 + 170)] 1.385 = ẞ Equity [410 / 580] + 0.24 [170 / 580] ẞ Equity = 1.860 (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) ẞ KGFL = 0.248 + 0.345x 1.385 = 0.248 + 0.345x 0.345x = 1.385 – 0.248 x = 1.137/0.345 = 3.296 ẞ KGFL = 3.296 (iii) Since there is no increase in the value of equity after buyback, it does not justify the increase in the equity beta.