Asset Beta Factor Characteristics

Asset Beta Factor Characteristics

Asset beta Factor other name is un geared beta, or unlevered beta.

1.    Business Risk

Asset beta represents only business risk, and it does not change with the financial risk of the company. It means level of gearing does not impact asset beta for an industry.

2.    No Impact of Level of Gearing

Asset beta for industry does not change with level of gearing. It means debt has not impact on the asset beta, because it represents business risk only, which has not relevance with financial risk.

3.    Asset Beta Calculation

Asset beta may be calculated from equity beta, it is important to remember that equity beta carry both risk i.e. business risk and financial risk. Asset beta may be calculated, where equity beta is given;

Asset Beta Calculation Example

A company is interested in Capital investment project. Company has calculated equity beta i.e 1.8 & Ration of Equity to Debt ratio is 7:3. Corporate tax is 30% .Calculate the asset beta of the industry.

Solution

βa = [Ve/Ve + Vd (1-t)] x βe

= [7/6 + 3 (1-30%)] x 1.8

= [7/7+2.1]x1.8

=[7/9.2]x1.8

=.760x1.8

=1.36

4.    Asset Beta Purposes

Asset beta is calculated

·         New project financing is different from Company Financial Structure.

·         New Project will change level of Gearing in Company.

·         Private Company Comparison.

5.    Asset Beta Lower than Equity Beta

Asset beta is lower than equity beta, as it only represents the business risk. This is very important accuracy check, while you are calculating the asset beta for an industry from its equity beta