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Dear Mr Moffat,
I have some issues reagrding regearing and degearing of beta.
1st step: We need to degear equity beta by using the formula to get asset beta
2nd step: We need to find market values of equity and debt
3rd step: Regear the asset beta to find equity beta.
4th step:Using CAPM, find cost of capital
5th Step: Calculate WACC.My question is that when we degear should we take Ve and Vd based on the debt to equity ratio or market values of debt and equity?
And when we regear should we take Ve and Vd on the debt to equity ratio or market values of debt and equity?
I am slightly confused with it.I shall highly appreciate if you can help.
Thanks and kind Regards,
Nitisha
Your steps are correct (except 4th step is using CAPM find cost of equity)
Ve and Vd are always based on market values both for ungearing and for regearing. (Although they will be different market values – for ungearing we use the gearing of the similar company whose equity beta we are using; for regearing we use the gearing of our company)
Respected john sir,
Can you please explain me a little about this mcq.
It’s 197 in bpp new kit (cbe style ot case iml co)
The answer says that if share price moved at three times the market rate, equity beta factor would be 3.Ok so how do i relate it now? According to book it would be like this:
the equity beta factor currently is 1.2. So the answer says that if share price (3.15$- as per the question is share price at the end of year) moved at three times the market rate i.e. 3.15×3=9.45$, the equity beta factor will become 3 from 1.2.
I know doesn’t make any sense, but unfortunately i can’t make sense of it sir. Please help.
Also, the books says in the answer section
“Equity beta is a measure of volatility of return on share to stock market. If share price moved at three times the market rate, equity beta would be 3.”What did the terms used above meant? Do they mean share price as 3.15? And three times as 3.15×3=9.45?
I am not getting anything 🙁I am so sorry i just noticed thsy this is forum for p4 and i asked about f9. I am not good in using the forum site of opentuition as i recently started using it. Would you mind answering it here?
As the market overall (the stock exchange index) goes up and down, so too do all share prices go up and down. Some are more risky and go up and down more, some are less risky and go up and down less.
A beta of 1.2 means that if the market goes up or down by (say) 1% then the share price will go up and down by 1.2 x 1%.
My lectures on CAPM should help you understand.
I have already seen your lectures sir and i can not thank you enough for providing so valuable lectures for free. But sometimes the the questions are stated in a way that confuses me even though i have gone through the lectures.
” As the market overall (the stock exchange index) goes up and down, so too do all share prices go up and down. ”
Can i understand from this that share price movements are directly related to the beta factor? I.e. if share price rises, it means that beta factor would rise too? And vice versa, right?
Sorry i am a bit dumb sir 🙁No – the beta factor measures the riskiness of the share, and only changes if the company becomes more or less risky.
As the stock market goes up and down (which it obviously does) each individual share goes up and down as well – some go up and down more because they are more risky (and therefore have a beta of more than 1), some go up and down less because the are less risky (and therefore have a beta of less than 1).
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