i couldnt focus because i wondered the whole time if he writes backwards or not... and then i was thinking about how they could have recorded it like that
Great question! When I studied for Level 1 many years ago, that also confused me somewhat :) And to be quite honest, I never took the time to derive this mathematically :( I think the best way to explain is to emphasise that we are not talking about the cost of capital here but how the two sources of capital contribute to the sensitivity (beta) of the company to market conditions. The presence of debt is alsways going to decrease that sensitivity (beta), whatever the interest rate. However, that lowering effect is somewhat less pronounced due to the presence of the tax shield and that's what we are trying to express here. THIS TOOK ME A RALLY LONG TIME TO FIGURE OUT - and I only understood this when I started to teach CFA :)
@@letmeexplaincfa okay sir, but if we talk outside this particular cfa question, is this still true? i learn from other source that unlevering company's beta means we only incorporate company asset into the beta (so it dont matter if they are in the same industry, the asset beta wont be the same due to different amount of asset). While if you want to compute industry beta you get by averaging or median couples of company asset beta within same industry. is this true sir?
Yes, when you compute asset beta, you are taking into account a company's specific operating policies, such as its relationship between variable and fixed operating costs. For example, companies which rely more heavily on their own equipment and own staff will have higher fixed costs and therefore experience more sensitivity to market conditions, as illustrated by a higher asset beta. In constract, a company operating in the same industry, but relying more on outsourcing (of equipment and staff) will have a lower asset beta. To get a true idea for and industry's asset beta, you should indeed look at a sample of companies and average the results.
Thank for the message. Unfortunately not right now. I am focusing on developing Lvl 1 material right now. I hope to get to Lvls 2 and 3 soon, but that will probably come in 2023
@@letmeexplaincfa a small suggestion for channel growth, perhaps change your TH-cam name to stay consistent with something that’s related to finance or cfa, like Finance explained or CFA explained smt like that. Great content btw !
@@grievousrationality4664 Thank you for the suggestion. I am glad you are enjoying the content. I have actually consciously avoided the reference to CFA in the channel name as the CFA Institute are very strict on using the three letters in names of companies, websites, etc … and I would like to stay on their good side😀👍😀
This video is excellent Wojciech, super helpful. Keep doing what you're doing man.
Thanks, it means a lot to receive messages like this!
Love the production value! Amazing lecture!
Thank you very much!
i couldnt focus because i wondered the whole time if he writes backwards or not... and then i was thinking about how they could have recorded it like that
I don’t write backwards, nor do so write with my left hand. The image is flipped in postproduction😀
😂😂
Thanks a lot for this content. I am watching all your vids for my Lvl1 Test. God Bless you mate, your work is awsome!
You are very welcome! Thank you 🙏
Thorough explanation!
Thank you
Thank you, very helpful video. Why are we dividing both numerator and denominator by E? Thanks
Excellent, thanks!
Thank you for the video. Why is D multiplied by (1-t), isn't it supposed to be multiplied to Interest expense?
Great question! When I studied for Level 1 many years ago, that also confused me somewhat :) And to be quite honest, I never took the time to derive this mathematically :(
I think the best way to explain is to emphasise that we are not talking about the cost of capital here but how the two sources of capital contribute to the sensitivity (beta) of the company to market conditions. The presence of debt is alsways going to decrease that sensitivity (beta), whatever the interest rate. However, that lowering effect is somewhat less pronounced due to the presence of the tax shield and that's what we are trying to express here. THIS TOOK ME A RALLY LONG TIME TO FIGURE OUT - and I only understood this when I started to teach CFA :)
whether an unlevered company can have debt?
if yes how.? if no why we are using D(1-t).?
hello sir, i have some confusion. after calculate unlevered beta, so youre assuming that every company within same industry have same asset beta?
Yes, that is the correct conclusion :)
@@letmeexplaincfa okay sir, but if we talk outside this particular cfa question, is this still true?
i learn from other source that unlevering company's beta means we only incorporate company asset into the beta (so it dont matter if they are in the same industry, the asset beta wont be the same due to different amount of asset). While if you want to compute industry beta you get by averaging or median couples of company asset beta within same industry. is this true sir?
Yes, when you compute asset beta, you are taking into account a company's specific operating policies, such as its relationship between variable and fixed operating costs. For example, companies which rely more heavily on their own equipment and own staff will have higher fixed costs and therefore experience more sensitivity to market conditions, as illustrated by a higher asset beta. In constract, a company operating in the same industry, but relying more on outsourcing (of equipment and staff) will have a lower asset beta.
To get a true idea for and industry's asset beta, you should indeed look at a sample of companies and average the results.
@@letmeexplaincfa thanks a lot for the englightenment:)
@@gigachad-eu5mj You are very welcome
Thank you it was very helpful 👍🏼
You’re very welcome!
Do you provide material, mock test for CFA level 2 and 3? Thanks.
Thank for the message. Unfortunately not right now. I am focusing on developing Lvl 1 material right now. I hope to get to Lvls 2 and 3 soon, but that will probably come in 2023
@@letmeexplaincfa a small suggestion for channel growth, perhaps change your TH-cam name to stay consistent with something that’s related to finance or cfa, like Finance explained or CFA explained smt like that.
Great content btw !
@@grievousrationality4664 Thank you for the suggestion. I am glad you are enjoying the content. I have actually consciously avoided the reference to CFA in the channel name as the CFA Institute are very strict on using the three letters in names of companies, websites, etc … and I would like to stay on their good side😀👍😀
📈💪
Thank you!