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BPP- Mock 2 – Q3 Tampern Co

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › BPP- Mock 2 – Q3 Tampern Co

  • This topic has 1 reply, 2 voices, and was last updated 11 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • December 1, 2013 at 6:20 pm #148918
    rmracca
    Participant
    • Topics: 9
    • Replies: 10
    • ☆

    Hi Tutor ,

    A company is deciding how new investments should be appraised – either NPV or APV or MIRR
    Investment will be financed 50% equity and 50% Debt and expected company gearing after investment will be Equity 60% and debt 40% to Market value .
    Investment equity beta is given as 1.5
    No data has been given regarding market values of debt or equity

    ======================================
    Now we can calculated asset beta using asset beta formula so that the value can be used for APV calculations:
    Asset beta = 1.5 * Ve / Ve + Vd ( 1-t )
    In the solution they have shown the following :

    Asset beta = Equity Beta * E / ( E+ D ( 1-t ))
    Used E= 1 and D = 1 and arrived at an answer = 0.882

    Could you please explain why they used E = 1 and D =1 ?

    Many thanks in advance,
    Regards,
    RMR

    December 1, 2013 at 8:42 pm #148955
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54668
    • ☆☆☆☆☆

    It is because it is to be financed 50%/50%.

    You could have used 50 and 50 instead of 1 and 1 – you would get the same answer.

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