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BPP kit Q 189

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › BPP kit Q 189

  • This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • July 20, 2016 at 2:56 pm #328008
    boma77
    Member
    • Topics: 70
    • Replies: 97
    • ☆☆

    Dear Tutor,

    Is it possible that in this questions the gearing level is 4:1 and not 1:4 debt to equity?

    TR Co has a gearing level of 1:3 debt : equity. TR is considering diversifying into a new market. B Co is already operating in the new market. B Co has an equity beta of 1.05 and a gearing level of 1:4 debt : equity. Both companies pay 30% corporation tax.

    According to the answer beta is 0.89.

    July 20, 2016 at 7:02 pm #328075
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I don’t really understand what you are asking.

    If the question days that the ratio of debt to equity is 1 to 4, then this is all that is relevant for the asset beta formal.

    You need to use the formula to calculate the asset beta (with an equity beta of 1.05 and using the gearing of B) ) and then use the formula again to calculate the new equity beta (using the gearing of TR).

    July 20, 2016 at 7:14 pm #328083
    boma77
    Member
    • Topics: 70
    • Replies: 97
    • ☆☆

    Sorry for the question.
    I have confused the numbers. It’s all clear now.

    July 20, 2016 at 8:53 pm #328108
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I am pleased that it is now clear for you 🙂

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