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Cost of equity mcq

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Cost of equity mcq

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • November 16, 2015 at 5:17 pm #282941
    Hafsa
    Member
    • Topics: 11
    • Replies: 8
    • ☆

    AJT has gearing ratio (debt:(equity+debt) of 30% and pays corporation tax 25%.AJT has an asset (ungeared) beta 1.2. The risk free rate is 5% and market return 12%.
    What is the cost of equity?
    Please help me out.

    November 16, 2015 at 8:45 pm #283139
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    The gearing is 30% debt, 70% equity.

    Using the asset beta formula:

    1.2 = (70 / (70 + (0.75 x 30)) x equity beta

    Therefore equity beta = 1.5857

    Therefore the cost of equity = 5% + 1.5857 (12% – 5%) = 16.10%

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