Chrysos – Specimen 2017

This topic has 3 replies, 3 voices, and was last updated 8 years ago by John Moffat.

Viewing 4 posts - 1 through 4 (of 4 total)

Author

Posts
November 27, 2017 at 12:46 pm #418407
dolphinslover
Member
- Topics: 26
- Replies: 15
Hey

I am having trouble understanding how the specimen answer for Cost of equity is 14.09. Please Explain. It will be appreciated.

Ke = 12.46% + (0.82*(12.46% – 4.5%) * (0.20/0.8)
= 14.09%

Thanks.
November 27, 2017 at 2:15 pm #418425
John Moffat
Keymaster
- Topics: 57
- Replies: 54851
We know what the ungeared cost of equity is (12.46%), and so to calculate the geared cost of equity (which is what is needed) the examiner has used the first formula on the formula sheet (M&M Proposition 2 with tax).

The alternative would have been to calculate the ungeared beta based on 12.46%, then calculate the geared beta, and then calculate the cost of equity using the geared beta. It would end up giving exactly the same answer, but is much more messy and takes longer.
November 29, 2017 at 12:45 pm #418874
ameera98
Member
- Topics: 3
- Replies: 34
The value of Mining dept using FCF is 47944. And they said the company will maintain 20:80 capital structure D:E. Why can i not find the MV of equity by multiplying 47944 by (80/100)??
November 29, 2017 at 5:55 pm #418944
John Moffat
Keymaster
- Topics: 57
- Replies: 54851
But the examiner does mention this in his answer, in the second paragraph under ‘impact of the restructuring program……’. However the 20:80 is a long term aim, and what happens in the short term depends on how the finance is raised in the short-term.
Author

Posts

Viewing 4 posts - 1 through 4 (of 4 total)

The topic ‘Chrysos – Specimen 2017’ is closed to new replies.