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CAPM and MM Combined – Chapter 21

This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.

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August 6, 2020 at 3:33 pm #579442
kimbeckett1
Member
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Hi John.
Could you please explain working Q200-BPP: S Co Equity Beta 1.6 and debt: equity 1:3 considering new project to manufacturing farm has asset beta 1.1 and debt: equity 2:3. The risk free rate return is 5% risk premium is 3%, corporation tax rate 40%, Using CAPM, what suitable cost of equity for S Co to use its in appraisal of the farm project( 1 decimal place)?
I have following your example 3 chapter 21 , my answer: 7.8%, it incorrect!
August 6, 2020 at 9:52 pm #579476
John Moffat
Keymaster
- Topics: 57
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Yes, it is incorrect.
The BPP answer is correct. I don’t know how you arrived at 7.8%, but we know the asset beta for farming and the asset beta needs regearing for S’s gearing ratio to be able to calculate the suitable cost of equity to be used.
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