1. avatar says

    The Debt : Equity ratio is 0.4 as per the example. Please explain me how did you work out the Vd as 40% and Ve as 100% ?

    I have worked out the Ke as 0.15+0.7 x(0.15-0.08)x 0.4/0.6 = 18.26%
    and WACC 13.2%

  2. avatar says

    Hi Tutor ,
    In the example for debt/equity ratio 0.4 you said debt is 40% and equity is 60% , so if the D/E =0.6 does that imply the debt is 60% and equity 40%? and if D/E 0.25 – debt is 25% and equity 75%?

    • Avatar of John Moffat says

      I don’t think that I did say that, and I certainly used the correct figures in the example.

      A debt/equity ratio of 0.4 does not mean that debt is 40% and equity 60% (if that was the case, the ratio would be 40/60!)

      • avatar says

        Hi Tutor ,

        My apologies in advance for asking a silly question.For a given gearing ratio ( Vd/Ve ) = 0.4 , how did you work out the Vd as 40% and Ve as 100% ?

    • Avatar of John Moffat says

      No – there is not a specific lecture.

      However the only extra technique needed is to be able to forecast future exchange rates using the purchasing power parity formula. This was covered in F9 and there is a chapter revising it in the P4 course notes.

      Otherwise it is a question is setting up the foreign cash flows in exactly the normal way, but in the foreign currency. Then converting the foreign currency to the home currency using the forecast exchange rates. Then adding any other cash flows that there may be in the home currency, and then discounting.

      It can get very messy, but the problem is more just the arithmetic involved then any extra special technique.

  3. avatar says

    You put my lecturers to shame with your skill at explaining things. I think it’s because you undoubtedly understand (extremely well) what it is you are teaching.Thanks so much

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