Hello Sir,
Please answer me...
On a market value basis, GFV Co is financed 70% by equity and 30% by debt. The company has an after-tax cost
of debt of 6% and an equity beta of 1·2. The risk-free rate of return is 4% and the equity risk premium is 5%.
As per official answer its
Cost of equity = 4 + (1·2 x 5) = 4 + 6 = 10%
WACC = (10 x 0·7) + (6 x 0·3) = 7 + 1·8 = 8·8%
but I am doing it like
Cost of equity= 4 + 1.2 (5-4)
isn't it right as per formula E(r)= Rf + Beta (E(rm) - Rf)
Please answer me.
Many thanks
Ask the Tutor ACCA FM
june 2015 MCQ: 19
11y ago#1The question says that the equity risk premium is 5%, not that the market return is 5%.
(The risk premium is the excess over the market return over the risk free rate).
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