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Dec 2013 ques 3 a

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › Dec 2013 ques 3 a

  • This topic has 5 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • November 2, 2014 at 10:49 pm #207321
    sradhakanchi
    Participant
    • Topics: 7
    • Replies: 15
    • ☆

    Can anyone explain the calculation of this ques? Thank you in advance.

    November 3, 2014 at 5:04 pm #207431
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    It would help if you said which bit of the calculation is causing you a problem.

    If it is calculating the asset beta, then when two streams with different betas are combined then the overall beta is the weighted average of the individual betas. (If it is this bit that is causing the problem, then the free lectures on CAPM will help you)

    November 4, 2014 at 12:08 am #207586
    sradhakanchi
    Participant
    • Topics: 7
    • Replies: 15
    • ☆

    Thanks. I was confused with the asset and equity beta was calculated.

    And calculation of total PV of cash flows years 5 to perpetuity. I got different numbers than in the solution.

    November 4, 2014 at 5:26 pm #207693
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Which different numbers?

    The cash flows themselves, or was it the discounting that was the problem?

    November 5, 2014 at 5:08 pm #207854
    bee1214
    Member
    • Topics: 3
    • Replies: 3
    • ☆

    I was also confused how is the PV of years 5 to perpetuity calculated

    November 5, 2014 at 5:17 pm #207858
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You can get the discount factor in 2 ways (both give the same answer, subject to rounding which is irrelevant).

    Method 1:

    Calculate the discount factor for 1 to infinity (which is 1/r)
    Subtract the annuity factor for 1 to 4.
    That leaves you with the factor for 5 to infinity.

    Method 2:

    Calculate the discount factor for 1 to infinity (which is 1/r).
    However, because is starts 4 years later (time 5 instead of time 1), you then multiply by the ordinary 4 year discount factor.

    Again, both answers will be the same apart from rounding.

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