1. avatar says

    Dear John,
    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.

    • Profile photo of John Moffat says

      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.

  2. avatar says

    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.

  3. Profile photo of John Moffat says

    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. (

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