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ACCA F9 lectures ACCA F9 notes
June 3, 2015 at 10:04 pm
good day sir
i am looking at a pass paper answer and this is what they did. i dont understand this part beta = 0·842 x (5Equity 7,280 + (5,171 x 0·7))/57,280 = 0·895
First, the proxy company equity beta must be ungeared:
Asset beta = (1·038 x 0·75)/(0·75 + (0·25 x 0·7)) = 0·842
The asset beta must then be regeared to reflect the financial risk of Card Co:
Equity beta = 0·842 x (57,280 + (5,171 x 0·7))/57,280 = 0·895
Project-specific cost of equity = 4 + (0·895 x 5) = 8·5%
John Moffat says
June 4, 2015 at 7:37 am
Please ask this sort of question in the Ask the Tutor Forum in future – not as a comment on a lecture.
It is using the asset beta formula ‘backwards’ using the gearing of Card. We know the asset beta, we know the gearing, therefore we can use the formula to calculate the equity beta.
April 29, 2015 at 2:39 pm
hello sir please help me on this
How do you re gear the beta to the company’s own debt to equity ratio?
April 29, 2015 at 4:16 pm
You use the asset beta formula ‘backwards’. You know the asset beta and you use the company’s own gearing.
April 29, 2015 at 5:49 pm
Thank you sir. Is it something you cover in P4?
Do you have any lectures on valuing a business by the net assets methods, P/E method or dividend growth method?
April 29, 2015 at 5:53 pm
It is covered in P4, although I will add another lecture to F9 in the next few weeks dealing with it.
Chapter 15 and 16 of our free Lecture Notes (and the lectures that go with them) cover what is required in F9 for valuation.
(Our notes and lectures are a complete course and should be watched in order)
June 24, 2014 at 5:05 pm
So in f9 it is fully assumed to be finance by equity, hence Ba, by ungearing. If its not share beta then we use simple beta and req return. If both not given these conditions, we use wacc ie to use grwoth model for equity and apply debt formulae as you taught.
June 24, 2014 at 5:18 pm
I am going to amend the lecture slightly. When the examiner brought this into the syllabus a few years ago it was not quite clear what he intended. Now he has asked it twice it seems that he wants you to assume that the company is maintaining its current gearing.
So when he asks for the ‘project specific cost of equity’, he expects the following:
1) take the equity beta from a similar company and use the formula to calculate the asset beta (using the other company’s gearing to ungear it.
2) from this asset beta, use the formula again to calculate an equity beta, using the gearing of our company.
3) calculate the cost of equity from this equity beta – this is the ‘project specific cost of equity.
With regard to when to use the growth model and when to use CAPM, the examiner always makes it clear in the questions or only gives you information to be able to do it one way.
(In theory they would both give the same answer – in practice they do not and CAPM is regarded as being better)
For ‘project specific cost of equity’ it is always using CAPM.
June 24, 2014 at 6:54 pm
November 5, 2014 at 2:36 am
Dear John, question.
I’m a bit confused, as you taught, the beta a we have is bets with no gearing(ie. entirely financed from equity), then why do we use the euity beta to get the project specific cost of equity? Shouldn’t we use the beta a directly?
November 5, 2014 at 12:21 pm
If were only using equity to finance the project then you would be correct.
However in Paper F9 the examiner expects you to assume that we are maintaining our existing gearing ratio and therefore need to re-gear the beta.
November 7, 2014 at 1:13 pm
so, we assume in F9 all projects are equity finance
debt comes into place at p4
what is re-gear as u mention above and why do we need to do that?
clear me in simple words sir
because I have fully understand ur lecture video
but confuse with re-gear thing
November 7, 2014 at 1:30 pm
And why we need to take into account our gearing ?
if we are doing a different project
clear me on these points sir
November 7, 2014 at 5:22 pm
We assume that we are maintaining the current level of gearing that exists in the company, not that it is all equity financed.
So the cost of equity is determined by the beta of the equity in the project, which is determined by the risk of the project together with the risk due to the gearing – i.e. the equity (re-geared) beta.
December 6, 2013 at 2:48 pm
Master John ! Thank you so much, the test was easy thanks to you !
December 6, 2013 at 3:00 pm
That’s great – I am glad that the exam went well.
December 6, 2013 at 3:05 pm
Funny thought, I wish you could be the minister of finance & economy in my country. I live in a an economically depressed country. I’m sure you’d make an awesome minister 😀
December 6, 2013 at 3:11 pm
I am not so sure about that
October 30, 2013 at 6:18 am
these lectures are amazing. I can tell from the lectures that you put your heart and soul into it. Thank you sir
October 30, 2013 at 7:23 am
November 19, 2013 at 12:47 am
I concur… May god continue to bless you sir
October 26, 2013 at 10:54 am
Lovely job with those lectures! It is all very clear and interesting!
October 4, 2013 at 9:05 pm
Thank you John,The topic was well explained,No need of memorizing as the topic was well understood.You are a teacher not a lecturer and i appreciate you for that.Also u did try as much as possible to simplify f9 which is very helpful. Cheers and keep up the good work,God Bless you.
October 4, 2013 at 9:30 pm
Thank you very much
September 16, 2013 at 7:22 pm
Does it. Mean in f9 you will not be required to ungear and regear .u only ungear and then use it to find the cost of equity. Is this wat u mean
September 16, 2013 at 9:16 pm
You can be asked to ungear, and then to regear for the gearing of the particular company.
April 7, 2013 at 10:13 pm
Hi sir when do we ungear and re gear instead of just using the ungeared beta in CAPM formula?
April 8, 2013 at 6:23 am
If we are using beta to calculate the cost of equity, then we need the geared beta because that measures the riskiness of the share itself.
June 10, 2012 at 4:47 pm
Thank you sir, you are simply the best
May 5, 2012 at 11:01 am
Yes – if you are asked for the cost of equity then this is correct.
The cost of equity is always determined from the geared (equity) beta.
(although obviously if the company is all equity financed, or if the project is to be financed all from equity, then the geared beta will be the same as the ungeared (asset) beta. (
April 6, 2013 at 11:30 am
So sir this sort of question cant come ryt?cz we only get questions which will be fully financed by equity and hence no gearing??
December 6, 2013 at 3:12 pm
Not true. You can be asked to calculate the equity beta from the asset beta – so that you can calculate the cost of equity for a geared company.
May 4, 2012 at 7:05 pm
In the bpp study text. They un-gear the beta and re-gear it according to current company and then use it in the formula to get cost of equity…
April 14, 2012 at 1:10 pm
Thank you for the explanation on the Discount rate to use for the exam question
November 30, 2011 at 1:35 pm
This is surely a class act!
My only wish is to have a lecturer like you when I do P4.
Saad Bin Aziz says
December 5, 2011 at 2:58 pm
p4 ! yes john we need you!
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