hello sir,
would u mind to explain me again , what is market return means, ? is it something like , for the same share market gives a avg return of x%?
thanks

Dear John,
Its quite easy and logical. what is project-specific and marginal cost of capital…and if waac is not suitable for unsimilar business risk situation, then is it same to simple interest rate( cost of cap.)?

I am not completely sure what you mean (‘is it same to simple interest rate….’).

Usually we discount at the WACC, and this assumes that the gearing is remaining unchanged and that the business risk is remaining unchanged.

You can be asked to deal with the situation we the business risk is changing. To do this we need to obtain an asset beta for the project (which is the measure of the riskiness); then we have to calculate an equity beta from the asset beta (using the existing gearing of the company); then we use that to calculate a cost of equity for the project (the project-specific cost of equity).
Usually that is all that is required in the exam. However, if you were asked for it, in order to find an appraisal rate we then calculate a WACC for the project in the normal way, but using the project specific cost of equity (already calculated) in the calculation.

Thanks John. Enjoyed the lecture. Though I think the lecture title is a little misplaced. It doesnt combine MM and CAPM. The example done is in the CAPM chapter

Hi Stacy, , you get $1.39 because of in your workings you wrote 14.8-0.03 . it should be 0.148- 0.03 instead. try it , you will realize it, common mistake when we do it fast…

@staceyhowe, Hi Stacy, , you get $1.39 because of in your workings you wrote 14.8-0.03 . it should be 0.148- 0.03 instead. try it , you will realize it, common mistake when we do it fast…

Here return to shareholders, E(ri) is equal to cost of capital of the new project.

I thought the question was asking for the minimum cash flow requirement in perpetuity for the project to be acceptable, in that case nearly 13,000 will give npv is zero, where project can be accepted.On that basis, 15,000 pa for ever is acceptable straight away as it gives a NPV of 15385 positive.

A nice example to integrate investment appraisal and CAPM.

arman90fy says

hello sir,

would u mind to explain me again , what is market return means, ? is it something like , for the same share market gives a avg return of x%?

thanks

John Moffat says

It is the overall return on the stock exchange – the average of the returns of all the shares on the stock exchange.

arman90fy says

got it. thank you sir

padmanaveen says

hello sir,

whatever video i open it repeats the video of Interest rate risk part a…

kindly help

Thanks

opentuition_team says

try another browser – your internet provider it seems might be blocking the streams. if all fails, use Tor Browser

acca2050 says

Dear John,

Its quite easy and logical. what is project-specific and marginal cost of capital…and if waac is not suitable for unsimilar business risk situation, then is it same to simple interest rate( cost of cap.)?

John Moffat says

I am not completely sure what you mean (‘is it same to simple interest rate….’).

Usually we discount at the WACC, and this assumes that the gearing is remaining unchanged and that the business risk is remaining unchanged.

You can be asked to deal with the situation we the business risk is changing. To do this we need to obtain an asset beta for the project (which is the measure of the riskiness); then we have to calculate an equity beta from the asset beta (using the existing gearing of the company); then we use that to calculate a cost of equity for the project (the project-specific cost of equity).

Usually that is all that is required in the exam. However, if you were asked for it, in order to find an appraisal rate we then calculate a WACC for the project in the normal way, but using the project specific cost of equity (already calculated) in the calculation.

Ahmed says

Thanks John. Enjoyed the lecture. Though I think the lecture title is a little misplaced. It doesnt combine MM and CAPM. The example done is in the CAPM chapter

John Moffat says

No – the title is correct.

Calculating an asset beta from an equity beta (and vice versa) is actually Modigliani and Miller.

ahmed says

Hi John, In your 1st example I still don’t get $1.75. I always get $1.39 even if i do 0.148-0.03

John Moffat says

But the first example in this lecture is calculating the beta of the share, so I don’t really know where you are getting these figures from!

harryamoatey says

plz the video does not function when using mozilla, could u check it plz.

John Moffat says

The video is working fine – check the technical support page. The link is above.

harryamoatey says

plz JOHN, am sorry for disturbing u, the problem was with my player, i have updated it and the video is working fine.

Matseliso says

can I download these lectures

opentuition_team says

lectures are on line only

Ken says

very nice.thanks again

jonathan83 says

Hi Stacy, , you get $1.39 because of in your workings you wrote 14.8-0.03 . it should be 0.148- 0.03 instead. try it , you will realize it, common mistake when we do it fast…

cheerios

staceyhowe says

In your 1st example I can not get $1.75 no matter what I do all I keep getting $1.39. What am I doing wrong?

jonathan83 says

@staceyhowe, Hi Stacy, , you get $1.39 because of in your workings you wrote 14.8-0.03 . it should be 0.148- 0.03 instead. try it , you will realize it, common mistake when we do it fast…

Ken says

@staceyhowe, hello, how was your exam?

funlover says

Here return to shareholders, E(ri) is equal to cost of capital of the new project.

I thought the question was asking for the minimum cash flow requirement in perpetuity for the project to be acceptable, in that case nearly 13,000 will give npv is zero, where project can be accepted.On that basis, 15,000 pa for ever is acceptable straight away as it gives a NPV of 15385 positive.

A nice example to integrate investment appraisal and CAPM.