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May 25, 2020 at 10:08 am
Hello Mr.John, Considering above question and answer, normally debt to equity (debt/equity) mean its d=0.4 ,e=1, And i understood this,
But here gearing is 0.4 where it can be debt/equity or debt/(debt finance+equity ) , to make sure this there is extra details (debt : equity)
when it states debt : equity (again its not debt /equity ) the total capital is = 1 , not equity = 1, (if i call back P5 APM’s EVA calculation) so here ve=0.6 , vd=0.4 ? OR am i missing something here please explain
Regards mohamed hamjath
John Moffat says
May 25, 2020 at 10:22 am
Writing debt:equity is a standard way of writing the ratio of debt to equity (i.e. debt / equity)
May 25, 2020 at 2:26 pm
May 25, 2020 at 2:40 pm
You are welcome 🙂
March 14, 2020 at 8:04 pm
Hi Sir, Mostly what we do is when debt:equity = 0.4 we assume debt is 0.4 and equity is 0.6 hence debt = 40 equity = 60 total Ve plus Vd = 100 is this wrong?
March 15, 2020 at 12:40 pm
Hi ark11! Remember that gearing is the proportion of debt finance to equity finance. How much of debt do we have compared to equity? That means we assume equity is 1 and debt is the proportion of that (i.e. 0.4).
Here, the debt is technically 40% of equity so we can assume that equity is 100 and debt is 40 of that, so total finance is 140. Calculate it in reverse to check: 40/100 = 0.4. If you used 40 and 60 in a debt:equity ratio, then you’ll have 40/60 = 0.67, which is incorrect.
Hope this helps!
May 24, 2020 at 10:05 pm
when it states debt : equity (again its not debt /equity ) the total capital is = 1 , not equity = 1, (if i call back P5 APM’s EVA calculation) so here shouldn’t be ve=0.6 , vd=0.4 ? OR am i missing something here please explain
May 24, 2020 at 10:07 pm
it has to be Ve=0.6 , Vd=0.4, isn’t it
July 20, 2020 at 6:27 pm
Hello Hamjath, If I’m understanding you correctly, it seems the part you are mistaken is that “total capital = 1”. It’s not.
Using (Debt:Equity) – Debt’s proportion to equity is 0.4. That means for every 1 equity finance, debt is 0.4 of that. Thus, total finance here will be 0.4 + 1 = 1.4.
March 28, 2019 at 12:46 pm
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!
March 28, 2019 at 2:55 pm
Thank you very much for your comment 🙂
February 16, 2019 at 2:58 pm
Thank you for your lectures.
I had a question : If we’re to use the CAPM model to find out the Beta, as suggested in your lecture , but I don’t know what number to use for return from the market as it’s not given in the question. Thank you
February 16, 2019 at 4:13 pm
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.
May 16, 2019 at 6:33 am
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!
May 16, 2019 at 7:35 am
Yes – exactly 🙂
August 13, 2018 at 3:16 pm
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.
August 13, 2018 at 7:45 pm
Thank you very much indeed for your comment 🙂
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