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Coeden Co (12/12)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Coeden Co (12/12)

  • This topic has 1 reply, 2 voices, and was last updated 2 weeks ago by John Moffat.
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  • Author
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  • May 15, 2023 at 7:44 am #684372
    sohyh1318
    Participant
    • Topics: 4
    • Replies: 3
    • ☆

    Hello, this might be a simple question but I really don’t understand it, will really appreciate it to get some help on it. Thank you.

    —Coeden Co—

    1.
    The answers calculated the cost of equity by using:

    4% + (1.1*6%) = 10.6%

    Why is it that we times the equity beta with the market risk premium to get the cost of equity. I don’t understand what is the relationship between equity/asset beta with market risk premium, and how does that allow us to get cost of equity?

    2.
    I get very confused when I have to ungear and regear the betas. I failed the last AFM attempt because partly because I got confused of it during exam. How can I break it down into smaller pieces and digest so I don’t get confused during exam?

    Many thanks!

    May 15, 2023 at 8:13 am #684379
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 52437
    • ☆☆☆☆☆

    The market risk premium is the excess of the average return of the market as a whole over the risk free rate. Individual shares are more or less risky that the market as a whole (and this is measured by the equity beta) and so the premium over risk free for each individual share is beta times the market premium.

    I do suggest that you watch my free lectures on all of this because I so explain it all (and the situation regarding gearing and ungearing betas) in detail, with examples.

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