for me, ‘why did we not take risk free rate + beta x (market rate – risk free rate), following the formula.’ is because, in the question, market rate is not given. But, it gave risk premium.

Hello John, Here comes one question that in June 2013 Q2, when calculation of Ke using the DGM, in the examiner’s answer why using (taking the root of 2.5 of 36.3/30.9-1) to get the g value, instead of (take the root of 4 of 36.3/30.9-1)?

Besides. can I take the root 3 of 35.0/30.9-1 to get the g?

I think you mean how do you decide which two guesses to make in order to estimate the IRR. Any sensible guesses will do (unless obviously the examiner specifies which guesses to use). (By sensible, what I mean is that it would be normally a bit silly to try 10% and 11%!) As I point out in my lecture on IRR’s, different guesses give slightly different answers because the relationship is not linear. However that does not matter – you get full marks for doing it the right way.

adaacca says

where is the cost of equity of 12% coming from??

John Moffat says

The question says to use a cost of equity of 12% for part (c).

mayzin1707 says

Dear Sir,

I can not download question paper. Please help.

May

John Moffat says

It is available on the ACCA website: http://www.accaglobal.com

Shawn says

Hi sir,

In part d of the question for cost of equity

you took the risk free rate + beta x market rate. (4 + 5×0.895)

Can i ask why did you not take risk free rate + beta x (market rate – risk free rate), following the formula.

Thanks in advance.

bazilah29 says

hi.

for me, ‘why did we not take risk free rate + beta x (market rate – risk free rate), following the formula.’ is because, in the question, market rate is not given. But, it gave risk premium.

risk premium= market rate-risk free rate.

please advise me if my answer is wrong.

John Moffat says

bazilah29 is correct 🙂

aliimranacca007 says

Here is given that Card co has an equity beta of 1.6 .. at then end of Q why we not use this figure

John Moffat says

Because that beta measures the riskiness of Card. We need the beta that measures the riskiness of the new project.

I really do suggest that you watch the free lectures on this.

ayeodele says

please post more question sir

Fang says

Hello John, Here comes one question that in June 2013 Q2, when calculation of Ke using the DGM, in the examiner’s answer why using (taking the root of 2.5 of 36.3/30.9-1) to get the g value, instead of (take the root of 4 of 36.3/30.9-1)?

Besides. can I take the root 3 of 35.0/30.9-1 to get the g?

Thanks in advance.

John Moffat says

He has taken the 4th root (because there are 4 years growth).

(x^0.25 means the same as 4th root)

You should take the earliest and latest dividend, so third root of 35.0/30.9 would not be correct.

Fang says

OK, got it. Thanks so much. Like your lecture so much!

jing says

yes, that is what i meant 🙂 thank you John!

John Moffat says

You are welcome 🙂

John Moffat says

There is only one IRR!

I think you mean how do you decide which two guesses to make in order to estimate the IRR. Any sensible guesses will do (unless obviously the examiner specifies which guesses to use). (By sensible, what I mean is that it would be normally a bit silly to try 10% and 11%!)

As I point out in my lecture on IRR’s, different guesses give slightly different answers because the relationship is not linear. However that does not matter – you get full marks for doing it the right way.

jing says

how do you decide which IRR to use in the exam?