• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

June 2025 ACCA Exams

How was your exam? Comments & Instant poll >>

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

Gearing and beta factors

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Gearing and beta factors

  • This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • March 9, 2016 at 12:19 pm #304717
    nicola
    Member
    • Topics: 5
    • Replies: 2
    • ☆

    I’m really struggling to understand the concept of gearing and ungearing beta factors I’ve listened to the lectures but still not comprehending the principle.

    This is an example question I really don’t understand

    TR Co has a gearing level of 1:3 debt:equity. TR is considering diversifying into a new market.B Co is already operating in the new market. B Co has an equity beta of 1.05 and a gearing level of 1:4 debt:equity Both companies pay 30% corporation tax

    Q. What is the asset beta relevant to TR for the new market

    The risk free rate is 4% and the market premium is 4%

    Q.What is TR Co’s cost of equity for assessing the decision to diversify into the new market?

    This will be the forth time I’ve sat F9 and getting desperate as passed all the other papers first time.

    Any help will be gratefully received.

    March 9, 2016 at 2:20 pm #304741
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    1. TR’s activity will have the same business risk as B. The equity beta of B measures all the risk of the share, including the gearing risk. So to get the business risk you need to use the formula to calculate the asset beta, using the gearing of B because it is the gearing risk of B that is included in the 1.05

    2. To get the cost of equity for T to use, you need to get the equity beta (which will be higher than the asset beta because there is gearing in T).
    So you take the asset beta already calculated and use the formula ‘backwards’ in order to get the equity beta to apply (using the gearing of T).

    Then you can use the normal CAPM formula to get the cost of equity: 4% + (equity beta x 4%)

    March 10, 2016 at 11:11 am #305200
    nicola
    Member
    • Topics: 5
    • Replies: 2
    • ☆

    John thank you very much for explaining it is so much clearer now.
    This site in invaluable and very much appreciated, having used BPP before i find your explanations so much more comprehensible an far easier to relate to.

    March 10, 2016 at 11:16 am #305206
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    Thank you, and you are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • manahylilyas on The financial management environment – ACCA Financial Management (FM)
  • poojam on Objective of financial reporting – ACCA Financial Reporting (FR)
  • mm3677 on IAS 16 Accounting for a revaluation – CIMA F1 Financial Reporting
  • Anastesia123 on MA Chapter 1 Questions Accounting for Management
  • John Moffat on MA Chapter 26 Questions Variance Analysis

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in