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This question defines gearing as debt to total market value. In my opinion, the total market value equals to the market value of equity. So the gearing would be Vd over Ve. But in the answer, it treats total market value as the sum of Ve and Vd.I am confused.
For gearing purposes, total market value is equity + debt (i.e. the total long-term finance).
So, it is not a new definition but a precise one. I understand it now. Thank you very much.
Hi Mr. Moffat,
I don’t understand the examiner’s answer on computation of the asset beta for Jupiter = 1.5 x (1 – 0.0756) = 1.387
I don’t understand the rationale behind the formula of Wd = 1 – T / Wd (-1) – T = 7.56%
where is the gearing ratio of 16.66% comes from?
Alternatively, I calculate the beta asset as follows:
Jupiter = 1.5 x 290 / (290 + (39.6 x 0.6)) = 1.386
Mercury = 0.9 x 5 / (5 + (2.14 x 0.6)) = 0.72Current market values : Mercury
Ve : 10m shares x $0.50 = $5m
Vd : 30%/70% x $5m = $2.14mDoes my alternative calculation of beta asset for both Jupiter and Mercury correct?
Thank you in advance for your reply.
Best regards,
KevinThe examiners answer does explain where the 16.66%.
However is a very poor question to use for practice, because it was set by the previous examiner (and the reason he is no longer the examiner is precisely because of questions like this one).
What you have done is fine and with the current examiner would get the marks 🙂
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