[Moses]

Dear John,

The explanation given above is not consistent with the dividend growth model in my opinion. Po = Do(1+g)/re-g. Using 0.23 indeed appreciates that there wont be any growth for a year. g=0 for 1 year. According to the formula, g is the same in the formula and can’t therefore represent different variables in the same working. i.e 0 in the numerator and 0.03 in the denominator. I guess the question has a problem. Please help.

[Moses]

Thanks. I was forgetting to add the dividend b4 discounting.

[Moses]

Plus, The assumption under EOQ is Optimum Order quantity with no buffer stock. The EOQ is delivered when Q=0. That’s why Average inventory=Q/2.

[Moses]

You are given an Asset beta. You need to covert it to the share beta as follows.
Asset beta = Ve/Ve+Vd(1-T) *Equity beta
1.2 = 100/(100+30*0.7)*Ke
Be = 1.47

Ke = ro + Be (rm-ro)
= 5%+1.47(12%-5%)
=15.29%

[Moses]

Appreciated John.

[Moses]

You are right to say it was an error. The above working where 70 is used would apply if gearing was Debt: (Debt+Equity).

[Moses]

As for the software. It is a matter of expanding the correct or incorrect inputs in the database. May be in future. Thanks very much.

[Moses]

Looking at how Kaplan treats it. Would I be wrong there fore to do it as follows and get the above answer? or you still insist it is an error.

Asset Beta = (Ve / Ve + Vd (1-T) ) x Equity beta

So, 1.2 = (70 / 70 + (30 x 0.75)) x equity beta

Equity beta = 1.5857

So cost of equity = 5% + 1.5857 (12% – 5%) = 16.1%

[Moses]

Thank you sir.

[Moses]

Is it possible to provide summary workings for the MCQs in the mock to avoid so many questions?. Thanks.

[Moses]

Seen it thanks. Sorry wasn’t familiar with the usage of forums.

[Author]

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