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Burang co J14

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Burang co J14

  • This topic has 3 replies, 2 voices, and was last updated 7 months ago by John Moffat.
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  • November 17, 2021 at 12:06 am #640830
    humai
    • Topics: 710
    • Replies: 233
    • ☆☆☆☆

    Sir in this Qs examiner has written following assumption in his answer:

    It is assumed that Proxy Co’s asset beta represents business risk of the project. The validity of this assumption needs to be assessed. For example, Proxy Co’s entire business may not be similar to the project, and it may undertake other lines of business. In this case, asset beta would need to be adjusted so that only project’s business risk is considered

    Sir instead of above, if I write following would it be fine?

    It is assumed that Proxy Co’s asset beta represents business risk of the project since both companies are in same industry, therefore they face same business risk

    November 17, 2021 at 7:42 am #640847
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49622
    • ☆☆☆☆☆

    Yes, that is fine.

    November 18, 2021 at 12:38 am #640926
    humai
    • Topics: 710
    • Replies: 233
    • ☆☆☆☆

    Thanks sir, likewise in fabuki D2010 Qs, examiner has written the following assumption

    Haizum Co’s (proxy co) ungeared cost of equity is used because it is assumed that this represents the business risk attributable to the new line of business. The ungeared cost of equity is calculated on the assumption that Modigliani and Miller’s (MM) proposition 2 applies.

    Sir if instead of above I write following then would it also be fine?

    It is assumed that Proxy Co’s ungeared cost of equity represents business risk of Co’s new line of business since both companies are in same industry, therefore they face same business risk. M&M proposition 2 is used to calculate Proxy co ungeared cost of equity

    November 18, 2021 at 7:44 am #640937
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49622
    • ☆☆☆☆☆

    Yes, that is fine as well.

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