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.
Ask the Tutor ACCA AFM
J08 Mercury Training Q(a)
10y ago#1For 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.
10y ago#3You are welcome :-)
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)) = 0.72
Current market values : Mercury
Ve : 10m shares x $0.50 = $5m
Vd : 30%/70% x $5m = $2.14m
Does my alternative calculation of beta asset for both Jupiter and Mercury correct?
Thank you in advance for your reply.
Best regards,
Kevin
7y ago#5The 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 :-)
Sign in to reply to this topic.