1. avatar says

    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%

    • Profile photo of John Moffat says

      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.

      • Profile photo of fahim231 says

        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?

        Thanks again

      • Profile photo of John Moffat says

        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)

  2. 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.

      • avatar says

        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?

      • Profile photo of John Moffat says

        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.

    • Profile photo of Ashwin says

      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

      • Profile photo of John Moffat says

        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.

  3. 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.

  4. 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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