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Hi sir,
can you explain to me hw to get the answer 16.10%.
AJT CO. has a gearing ratio (debt:(equity+debt))of 30%, and pay corporate tax 25%.
a share in AJT has a beta of 1.2. the risk free rate is 5% and market return is 12%.
What is the cost of equity for AJT.Sorry – there are two almost identical questions, and there is an error in the one you are referring to.
In this one we are given the equity beta, and therefore the cost of equity is determined by the beta of 1.2 and is 5% + 1.2 (12% – 5%) = 13.4%
I do apologise – it has now been corrected.
hi sir,
thx and noted.????
but may i know in what circumstance that gearing ratio will be use? when calculate for cost of debt ?No. The gearing ratio is relevant if you are given the asset beta instead of the equity beta.
It is the equity beta that determines the cost of equity, so if we are given the asset beta then you need to use the asset beta formula to calculate the equity beta.(The other similar question in the bank of questions used for the tests is identical except that you are told that the asset beta is 1.2. The answer to that question is 16.10% 🙂 )
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