Hi. These two questions have the same requirement but have two different workings. I understand the first working, but I'm confused as to why the used a completely different working in the second question for the same requirement. This is from the Study Hub.
1. Colt Co has an equity beta factor of 1.15 and an asset beta factor of 0.85. The risk-free rate of return is 8.5% and the market return is estimated at 12.4%. The corporate tax rate is 25%.
What is Colt’s geared cost of equity?
WORKING
The cost of equity geared is using the equity beta in CAPM (i.e. 8.5% + 1.15(12.4% - 8.5%) = 12.985%)
2. A company’s equity beta is 1.10 and its asset beta is 0.85. The market premium is 4.50% and the risk-free rate 3%
What is the company’s geared cost of equity?
A.4.3%
B.4.65%
C.6.8%
D.7.95%
WORKING
Using CAPM, the cost of equity geared = Risk-free rate + (market premium × equity beta) = 3% + (4.50 × 1.10) = 7.95%
Ask the Tutor ACCA FM
Geared cost of equity
The first one asks
The cost of equity geared , this
8.5% + 1.15(12.4% – 8.5%) = 12.985%
Ok so you are happy RF = 8.5% RM = 12.4% and Be = 1.15
But the second one
Has premium which is RM-RF already calculated as 4.5%
3% + (4.50) × 1.10 = 7.95%
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