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Equity Theory

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this describe brief about equity
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  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   (β) 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 β   equity= β asset{1+(1 -tax)D/E} where, E=Market value of equity D=Market value of debt t=Tax rate β=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 (β asset) =0.9  D/E ratio = 0.4 Tax rate(r) =40%(0.4) From the formular β equity= β 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%     
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