Chrysos – Specimen 2017

We know what the ungeared cost of equity is (12.46%), and so to calculate the geared cost of equity (which is what is needed) the examiner has used the first formula on the formula sheet (M&M Proposition 2 with tax).

The alternative would have been to calculate the ungeared beta based on 12.46%, then calculate the geared beta, and then calculate the cost of equity using the geared beta. It would end up giving exactly the same answer, but is much more messy and takes longer.

But the examiner does mention this in his answer, in the second paragraph under ‘impact of the restructuring program……’. However the 20:80 is a long term aim, and what happens in the short term depends on how the finance is raised in the short-term.