Good evening sir!
in this question we have to calculate the Ke using capm. for the gearing, the question writes the following:
"The gearing ratio for Rover airways, expressed as total debt to total capital (debt plus equity), is 60% and as total debt to equity is 150%"
the answer uses 150% but why? am a little confused on this.
regards
Ask the Tutor ACCA AFM
Fly4000 (BPP kit Q#38) - last year's kit
9y ago#1For every 100 of total capital, debt is 60 and therefore equity is 40.
So the debt is 60/40 times the equity.
So for every 1 equity, the debt is 60/40 x 1 = 1.5.
It does not matter what the actual total market value of the equity is, because we are only using ratios in the formula.
So they have treated the equity as being 1 and therefore the debt as being 1.5.
(You could use any value for the equity, and then the debt would be 1.5 x that value, and the end result would still be the same.)
oh! .. thank u!
9y ago#3You are welcome :-)
Sign in to reply to this topic.