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Hi, I can’t seem to figure out one of the mock exam questions, I thought i had to use CAPM to get to the answer of 16.10% but it doesnt work.
The question is:
AJT Co has a gearing ratio (debt: (equity+debt)) of 30%, and pays corporation tax of 25%. AJT has an asset (ungeared) beta of 1.2. The risk free rate is 5% and the market return is 12%.
What is the cost of equity for AJT?You do use CAPM, but it is the equity beta that gives the cost of equity whereas do the beta given in the question is the asset beta.
You need to use the asset beta formula to arrive at the equity beta.(The free lecture will help you with this)
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