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November 20, 2015 at 5:51 pm
In relation to part b where the project is financed by equity and debt in a ratio 50:50, I understand that this will change the gearing of the company and so the financial risk of the company will change.
I thought that we use APV method where the financial risk of the company changes as a result of taking up a project.
Please explain the reason the WACC method has been used in this question and not APV.
Many thanks for all your lectures, they are invaluable source of knowledge.
John Moffat says
November 20, 2015 at 6:07 pm
There is no rule about when to use APV rather than discount at the WACC.
However it is regarded as being a better approach when the gearing of the company as a whole is changing significantly (not just the gearing of the project).
These days, the examiner tells you if he wants you to use the APV approach
July 3, 2015 at 5:30 pm
February 7, 2015 at 6:15 pm
im grasping so far thanx Lecturer
November 28, 2013 at 4:13 pm
Please what if we are are an Oil company and we were going to invest in a Ship project, hence which means the business risk may be different from that of the company. The project will be all Equity financed and the current WACC is 10%. We were also given a similar company’s data in the shipping business. BUT Finally, the examiner drops a bomb and say after careful analysis, the company found out that taking on the project will not change the existing risk of the company.
In this case above, what should be the discount factor to use?
November 28, 2013 at 4:16 pm
It would be impossible for the examiner to do this. The only way that the existing risk would not change would be if oil carried the same risk as ships. If that were the case then using the asset beta for ships would still be the right approach (because the asset beta for oil would be the same)
If you see a question and you think he is doing this, then I really would read again very carefully
PS If you are asking questions of me, then it is better to ask in the Ask the ACCA tutor forum for P4. It is not always possible to check all the comments made below lectures – there are so many lectures – but questions in the Ask ACCA Tutor forums are always checked and answered.
November 28, 2013 at 4:55 pm
Thanks John, I will post future questions in the Ask ACCA Tutor forums.
Many Thanks really for this
October 30, 2013 at 10:29 am
Hi Tutor ,
Where can I find lectures relating to Valuations of mergers and acquisitions – Type 1,2,3 acquisition ?
October 30, 2013 at 10:57 am
There are no lectures on this yet. However the course notes contain all you need.
October 29, 2013 at 12:28 pm
Thanks for a great lecture.
But was wondering where can I find lecture relating to the alternative way mentioned at the end of lecture?
October 29, 2013 at 1:37 pm
The alternative way is adjusted present value, which is dealt with in chapter 12.
October 29, 2013 at 3:21 pm
October 29, 2013 at 3:35 pm
You are welcome
July 9, 2013 at 2:05 pm
opetuition tutors are great but you are marvellous: but where is the section for the alternative way
May 30, 2013 at 10:18 pm
I HAVE UNDERSTOOD THOUGH I MUST ADMIT ONE THEN NEEDS TO PAY PARTICULAR ATTENSION TO THE GEARING RATIO. That you need to understand like in the example above that when he says gearing ratio (debt to equity) of 0.4, it doesn’t mean 40% debt and 60% equity. I mean that was my initial confused assumption Admin. which would have also been in the exam too!
August 14, 2015 at 9:11 am
dont b panic .its simply means debt is 40 % of equity ultimately equity is 100%
April 27, 2013 at 9:45 am
Once again, Great lecture!….but, what is that alternative?
March 11, 2013 at 2:40 am
I’m not sure about one thing…In Example 11 the asset beta equals to 1.57, equity beta is 1.80. What about the difference of 0.23? What does it represent if we assume that debt beta is 0?
March 11, 2013 at 9:08 am
Gearing makes the shares more risky and therefore the equity (share) beta is greater than the asset beta (which is the risk if there was no gearing). The fact that we assume the debt beta to be zero is irrelevant in that more gearing will always make a share more risky.
There is no special significance attaching to the difference of 0.23.
September 30, 2014 at 5:51 pm
I am a bit confused about the using the asset beta in part a. as the question asked, “100% equity financed”, where I thought only equity beta has to be used. It got further confusing when equity beta was used to calculate the equity holders return in part b and c.
my question is, why equity beta was used for calculation of equity holders required return in part b and c; why not in part a?
September 30, 2014 at 7:46 pm
If there is no gearing, then the equity beta will be the same as the asset beta. (More gearing makes share more risky and therefore when there is gearing the equity beta is higher than the asset beta. However, when there is no gearing the equity beta is equal to the asset beta.)
Since the equity beta measures the risk to shareholders, it is always the equity beta that determines the return required by shareholders. The equity beta was used in part (a) – it is equal to the asset beta since is is 100% equity (i.e. no gearing).
May 23, 2012 at 10:55 am
the lecture is great but i wonder why we don’t consider tax effect on culculating wacc? why not culculate wacc as:[ve/(ve+vd)]*ke+[ve/(ve+vd)]*0.75*6%?
May 23, 2012 at 11:01 am
@bunnywong1986, oh sorry i see, 6% is after tax relief
May 22, 2012 at 8:31 pm
Awesome explanation !!
March 20, 2012 at 2:48 pm
HELP! I can’t see the rest of the ecture. It stops at around 21mins, after (Ke) for part b of the question
September 27, 2011 at 8:02 pm
This lecture has clarified most of the errors that I was making on this topic.
Thank you. I hope I will not repeat the same mistakes during exams.
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