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Sir can u please explain me why tax allowable depreciation not included before calculating tax in this question. Thanks
Sir in the same question can you please tell me how to find discount factor using asset beta.I could calculate Mv of equity as 37.95 and Mv of debt as 37.95 that brings the ratio as 1:1 ,cost of equity is given a 14 so using that i calculated asset beta as 8.13 after that please tell me further what to do.Thanks
First question:
Tax allowable depreciation (allowances) has been subtracted before calculating the tax – see workings 1 in the examiners answer.
Second question:
I don’t know how you calculated an asset beta of 8.13
Since the cost of equity is 14%, you can calculate the equity beta using:
14% = 4.5% + (beta x 4%)You then need to use the asset beta formula to calculate the asset beta and use this to calculate the cost of equity if there was no gearing.
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