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sciency96 says

At the end of this chapter, I will be halfway through the AFM syllabus and I should be happy but being done with AFM also means this will be my last exam taught by you, Mr Moffat so I am also very sad. You are indeed the best teacher I’ve ever had. I owe my pass in F5 and F9 to you. I also changed my mind and chose AFM instead of ATX because I enjoyed learning it so much! Thank you for all your effort!

John Moffat says

Thank you very much for your comment 馃檪

annakd says

Hi Sir,

Thank you for your lectures.

I had a question :

If we鈥檙e to use the CAPM model to find out the Beta, as suggested in your lecture , but I don鈥檛 know what number to use for return from the market as it鈥檚 not given in the question.

Thank you

John Moffat says

For example 1 in the lecture notes (which is the example that this lecture is working through), the beta is not needed because the MM formula (given on the formula sheet) does not require the beta, provided we know the ungeared cost of equity (which we do know, because it is given in the question).

What I do refer to is the fact that you could get the same answer by calculating the beta and then using the asset beta formula. This takes longer and so it is better an quicker to use the formula, but if you want to try it then use any market return you want and you will find that you end up with exactly the same result. (When I say use any market return you want, obviously it must be higher than the risk free rate of 8%).

If you are good with numbers then have a go and you will see what I mean. But in the exam, it is again faster and more efficient to use the formula that is provided on the formula sheet.

stevegeorge says

This is what i did…

I took/assumed return to market as 9%

As we know the ungeared cost of equity (in the question). We can find out the beta.

15%(Ke ungeared) = 8% + beta (9%-8%)

ungeared equity beta = 7

equity beta is equal to asset beta as it was ungeared

Be=Ba = 7

using Ba formula – to find out what the Be

ungeared beta we know to be as 7. What we want is geared equity Beta to later calculate the geared cost of equity.

7=1/1+0.4(1-0.3)*Be

7=0.78125*Be

7/0.78125=Be Be=8.96

Now i applied the new Be to the CAPM formula

Ke = 8% + 8.96(9%-8%) =16.96

Then we can use WACC…and get the same answer!

John Moffat says

Yes – exactly 馃檪

sahana20 says

Hello John, I’ve watched most of your lectures on open-tuition on P4/AFM and have absolutely enjoyed all of them! You make financial management seem logical and easy in the most effortless manner. Concepts which used to be abstract to me are absolutely clear, and all the credit goes to you. I wanted to thank you for all of your wonderful inputs. Words can’t express my gratitude.

John Moffat says

Thank you very much indeed for your comment 馃檪