mar350

1morelevel Wrote:
-------------------------------------------------------
> Irishgyy Wrote:
> --------------------------------------------------
> -----
> > Remember these principles, it works for me, you
> > can figure out the rest
> >
> > 1, the equity beta NEVER changes, the one
> changes
> > is asset beta.
> > 2. equity in balance sheet changes same
> direction
> > as equity in pension
> > 3. WACC uses operating assets beta
>
>
> Be careful. The equity beta changes if they
> reallocate the pension. Ie they change from 50%
> equity to 60% equity.



No, I am pretty sure they don't, there is a table in notes specifically illustrating that.

Zestt

awesome guys. That is why AF becomes family in May and June

Colum

If you reallocate more to the pension equity, the firm risk has increased and its stock will be more volatile. So with all else being equal, equity beta would increase.

I think what you are remembering from the book is the chart that showed the required change in the capital structure needed to OFFSET the changes in pension assets to maintain the equity beta.

For instance, if they rebalance to more equity in the pension, the company would need to delever, ie pay down debt or raise equity to maintain the equity beta at the same level.

Vice versa if they allocated more pension assets to fixed income, the firm risk would decrease and equity beta would fall. If they wanted to maintain the equity beta, they should add more risk to the operating balance sheet, ie buyback stock or issue more debt.

Darien

pupdawg82 Wrote:
-------------------------------------------------------
> awesome guys. That is why AF becomes family in May
> and June


Except when no one will send me old mocks.

canadiananalyst

.



Edited 1 time(s). Last edit at Sunday, May 30, 2010 at 03:34PM by pupdawg82.

bkballa

1morelevel Wrote:
-------------------------------------------------------
> If you reallocate more to the pension equity, the
> firm risk has increased and its stock will be more
> volatile. So with all else being equal, equity
> beta would increase.
>
> I think what you are remembering from the book is
> the chart that showed the required change in the
> capital structure needed to OFFSET the changes in
> pension assets to maintain the equity beta.
>
> For instance, if they rebalance to more equity in
> the pension, the company would need to delever, ie
> pay down debt or raise equity to maintain the
> equity beta at the same level.
>
> Vice versa if they allocated more pension assets
> to fixed income, the firm risk would decrease and
> equity beta would fall. If they wanted to
> maintain the equity beta, they should add more
> risk to the operating balance sheet, ie buyback
> stock or issue more debt.


That is what I mean, I view this is a swift process, you don't want to let the equity beta change, so asset beta is the one to change.

justin88

Neveruse,

Can we agree that the pension's allocation between equity and fixed income does NOT affect the leverage on the balance sheet (between Liabilities and Equity on the right)?

It DOES affect the riskiness of the pension assets, and thus the pension asset beta.

Only the funded status would affect the leverage of the balance sheet (since a pension deficit would mean Pension Liability > Pension Assets; a pension surplus means Pension Assets > Pension Liabilities, which, on an extended balance sheet, would result in different allocations on the right side between Liabilities and Equity).

If you write out an extended balance sheet, you'll see what I mean.

Windjam

There is no way we're gonna have to do this crap!??

Wasn't this level II? Was it even in the level III text? If so... uh oh. hahah

justin88

Pay close attention, this is NOT the WACC calculation you've seen at LI or LII.