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inverted formulae

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › inverted formulae

  • This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • October 18, 2019 at 10:42 pm #550129
    iloveaccountancy
    Member
    • Topics: 119
    • Replies: 111
    • ☆☆☆

    Hi John.

    May I ask your help?

    I was studying an exam kit (Kaplan). In the answer’s workings I have come across the normal formulae being ‘inverted’, as follows*:

    Project’s risk adjusted equity beta:
    B x (Ve+Vd(1-T))/Ve= XX.X% -> (‘Ve alone’ is at the bottom instead of at the the top)

    Projects risk adjusted cost of capital
    (xx.x% x Ve) + (y.y% x vD(1-T)) / (Ve + Vd) = ZZ.ZZ %

    *(the text has the relevant numbers, but i have put it here in its basic form)

    why are these workings ‘upside down’?

    October 19, 2019 at 10:09 am #550163
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The formula on the formula sheet provided in the exam is for calculating the asset beta when we know the equity beta.

    If on the other hand we know the asset beta and we need the equity beta, then we need to use the formula ‘backwards’.

    I do go through this, and the reasons for needing to do it, in my free lectures.

    October 20, 2019 at 12:12 am #550203
    iloveaccountancy
    Member
    • Topics: 119
    • Replies: 111
    • ☆☆☆

    Thanks John.

    I watched them but must have forgotten. May rewatch them.

    By the way, both here and in the lectures you describe everything so clearly, but my revision kit (Kaplan) makes the same method look much more complicated/confusing than it actually is.

    October 20, 2019 at 9:26 am #550231
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    True – I don’t know why they do make some things seem more complicated. It does not need to always be so complicated in the examiners 🙂

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Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘inverted formulae’ is closed to new replies.

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