Question 3

Equity simply referred to the part ownership in a company. This is the stock or any other security
representing an ownership interest.
equity is usually defined as the value of the assets contributed by the owners. This is added to the
total income earned and retained by the company to give the company's total equity value. This
description of equity is correct but very simplistic. A more profound description is really that
used by the homeowner, that is, equity is the owner's value in an asset or group of assets.
beta
Beta () of a stock or portfolio is a number describing the volatility of an asset in relation to the
volatility of the benchmark that said asset is being compared to. This benchmark is generally the
overall financial market and is often estimated via the use of representative indices,
Beta is a measure of the systematic, non-diversifiable risk of an investment. The beta coefficient
of a security, fund, or portfolio represents its market sensitivity, relative to a given market index
and time period
Equity Beta

An indication or measure of the systematic riskiness attaching to the returns on ordinary shares.
It equates to the asset Beta for an ungeared firm, or is adjusted upwards to reflect the extra
riskiness of shares in a geared firm., i.e. the Geared Beta
Public limited company
A company whose securities are traded on a stock exchange and can be bought and sold by
anyone. Public companies are strictly regulated, and are required by law to publish their
complete and true financial position so that investors can determine the true worth of its stock
(shares). Also called publicly held company.

Equity beta in the public limited company can be determined as follows

By using the formular

equity= asset{1+(1-tax)D/E}
where,
E=Market value of equity
D=Market value of debt
t=Tax rate
=Beta
example

Computer chips used in automobiles would qualify as automobile components, especially if they
could not be used for other purposes. Hence the appropriate beta would be the beta used for such
firms. Their asset beta is 0.9 and their D/E ratio is 0.4; and tax rate is40%.hence find the equity
beta.
Solution
Given
Asset beta ( asset) =0.9
D/E ratio

= 0.4

Tax rate(r)

=40%(0.4)

From the formular

equity= asset{1+(1-tax)D/E}

then,
Equity beta = 0.9 / (1 + (1 0.4)(0.4)) = 0.726

Therefore, equity beta=0.726=72.2%