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Ke Revision mock exam

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Ke Revision mock exam

  • This topic has 17 replies, 6 voices, and was last updated 10 years ago by John Moffat.
Viewing 18 posts - 1 through 18 (of 18 total)
  • Author
    Posts
  • November 3, 2014 at 4:06 pm #207414
    Moses
    Member
    • Topics: 7
    • Replies: 11
    • ☆

    Dear Sir,

    Kindly explain the difference between these two questions and their answers are as given.

    15) AJT Co. has a gearing ratio (Debt:Equity) of 30% and pays corporation tax of 25%. A share in AJT has a beta of 1.2. The risk free rate is 5% and the market return is 12%.

    What is the cost of Equity for AJT? Ans is a? how?

    a) 13.40%
    b) 11.36%
    c) 16.10%
    d) 19.40%

    16) AJT Co. has a gearing ratio (Debt:Equity) of 30% and pays corporation tax of 25%. A share in AJT has an asset (ungeared) beta of 1.2. The risk free rate is 5% and the market return is 12%.

    What is the cost of Equity for AJT? Ans is a? how?
    a) 16.10%
    b) 19.40%
    c) 11.36%
    d) 13.40%

    November 3, 2014 at 4:27 pm #207417
    Moses
    Member
    • Topics: 7
    • Replies: 11
    • ☆

    Is it possible to provide summary workings for the MCQs in the mock to avoid so many questions?. Thanks.

    November 3, 2014 at 6:03 pm #207545
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    in the first question, you are given the beta of the share. It is the share beta that determines the shareholders required rate of return and therefore the cost of equity.

    Cost of equity = 5% + 1.2 (12% – 5%) = 13.4%

    In the second question you are given the asset beta. To get the cost of equity we need the share beta and so need to use the asset beta formula.

    Asset Beta = (Ve / Ve + Vd (1-T) ) x Equity beta

    So, 1.2 = (100 / 100 + (30 x 0.75)) x equity beta

    Equity beta = 1.47

    So cost of equity = 5% + 1.47 (12% – 5%) = 15.25%

    (Sorry – there is obviously another error here 🙁
    It will be corrected immediately)

    If you are unsure about any of the workings above, then you should watch the free lectures on CAPM.

    November 3, 2014 at 6:04 pm #207547
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    Sorry, but we cannot provide workings in the test itself – the software will not allow it.

    November 3, 2014 at 7:42 pm #207562
    Moses
    Member
    • Topics: 7
    • Replies: 11
    • ☆

    Thank you sir.

    November 3, 2014 at 7:51 pm #207565
    Moses
    Member
    • Topics: 7
    • Replies: 11
    • ☆

    Looking at how Kaplan treats it. Would I be wrong there fore to do it as follows and get the above answer? or you still insist it is an error.

    Asset Beta = (Ve / Ve + Vd (1-T) ) x Equity beta

    So, 1.2 = (70 / 70 + (30 x 0.75)) x equity beta

    Equity beta = 1.5857

    So cost of equity = 5% + 1.5857 (12% – 5%) = 16.1%

    November 3, 2014 at 9:13 pm #207575
    Moses
    Member
    • Topics: 7
    • Replies: 11
    • ☆

    As for the software. It is a matter of expanding the correct or incorrect inputs in the database. May be in future. Thanks very much.

    November 3, 2014 at 10:47 pm #207581
    Moses
    Member
    • Topics: 7
    • Replies: 11
    • ☆

    You are right to say it was an error. The above working where 70 is used would apply if gearing was Debt: (Debt+Equity).

    November 4, 2014 at 5:23 pm #207691
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    Looking at how Kaplan treats it????

    Kaplan treats it in exactly the same way as I do – there is only one way of treating it – and of course it was an error on my part.

    It depends how the gearing ratio is given – it can be given in two ways (but the examiner always states which way he is using.
    It can either be given as the ratio of debt to equity, or it can be given as the ratio of debt to total long-term capital (which is debt + equity).

    Ooops – I have just seen your last comment, and you have obviously spotted it 🙂

    Be careful in the exam though – it is so easy in a hurry to read the wrong way and get the wrong ratio!!

    November 4, 2014 at 5:26 pm #207692
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    With regard to the software, we paid for the software, and although I appreciate that it can be expanded, it will have to wait until we can afford upgrading the software and can afford the time needed to enter all the workings.

    Appreciate that we are providing this website free of charge and our resources are therefore limited.

    Maybe in the future we will be able to add the workings, but not for the time being.

    Sorry 🙂

    November 5, 2014 at 6:10 pm #207864
    Moses
    Member
    • Topics: 7
    • Replies: 11
    • ☆

    Appreciated John.

    November 5, 2014 at 8:05 pm #207876
    cardine
    Participant
    • Topics: 4
    • Replies: 135
    • ☆☆

    Sir – John Moffat!

    Some of us may want to contribute to this rich site. It is very helpful and I would like to contribute to this when I am earning.

    Please let us know how we can help. Knowledge must be shared and support is critical to this.

    Thanks,

    November 5, 2014 at 8:48 pm #207883
    Aga
    Participant
    • Topics: 6
    • Replies: 11
    • ☆

    Hi Moses
    Based on what did you treat Ve as 70 and Vd as 30?
    Thanks a lot
    Agnes

    November 5, 2014 at 11:10 pm #207903
    jurga
    Member
    • Topics: 2
    • Replies: 6
    • ☆

    16Q is ungeeared beta, equity beta= 1.2 x (70+30(1-0.25))/70 =1,59 and then Ke=5% +1,59(12%-5%)=16,10%

    November 5, 2014 at 11:13 pm #207904
    jurga
    Member
    • Topics: 2
    • Replies: 6
    • ☆

    opps just read all replies,

    November 6, 2014 at 5:44 pm #208069
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    OK – I hope you are now happy with it (but do ask again if not) 🙂

    December 4, 2014 at 3:08 pm #217387
    rayeesmalol
    Member
    • Topics: 1
    • Replies: 3
    • ☆

    for 1st question mock exam shows correct answer as 11.36?

    December 4, 2014 at 3:40 pm #217412
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    I have just checked, and it does not show the correct answer as 11.36% !!!!
    (because that is the wrong answer 🙂 )

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