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This is a somwhat general question regarding M&M formula.Nearly, if not every question I have done so far,I haven’t had reason to use the M&M formula as I always use the CAPM and get the result I need after ungearing and regarding of betas .
now I’m worried maybe I’m missing something crucial here and so my question is that is there a specific scenario that they will ask to get the cost of capital where you will just have to use M&M ? And if so will you please highlight for me what scenario that would be?
You can never actually need the M&M formula. It is because the asset beta formula is derived from M&M formula and you can always answer questions using that instead (and I always would).
Sorry, which MM formula is being referred to here? The one in the formula sheet?
If yes, then there’s this one question in Dec 10, question no 2, fubuki co
They haven’t given the beta so the Ke is calculated through this formula…
Hope this helps 🙂Yes – the one on the formula sheet.
That question can still be solved without using that formula!
Sir, would you please solve and find Ke(u) with the CAPM approach for this question?
Hello Dear Moffat,
The data of the question (Fubuki December 2010 , Q2) are as follows:
Cost of equity=14%
Tax rate=28%,
Ve=37.95
Vd= 37.952
Rf 4.5%
Risk Premium=4.0%My solution:
1- Find Beta equity of Haizum:
14%=4.5% + Be * 4%, So Be=2.222- Ungeared B equity to find B asset:
Ba = 37.95*2.22/(37.95+37.952) = 1.113- Use CAPM:
Cost of equity = 4.5% + 1.11* 4% = 8.94%I have two issues regarding this question:
1 – Why my solution is not the same as the answer of ACCA. they calculated cost of equity as 10%.2- Why we assume that the project if fully financed through equity? In the paragraph above the last paragraph it says that Fubuko intends to raise finance through debt. So why we are just calculating the cost of equity at all!
Your help is much appreciated.
ThanksHello again!
I found the answer to my first question at https://opentuition.com/topic/fubuki-co/ 🙂
So would you please just answer the second question?Ohhh, Hello again !!!
I also found the answer to the second question! https://opentuition.com/topic/fubuki/ :))
They both have already been answered by you. Thank you!!!!
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