Makonis Co BPP40

This topic has 3 replies, 3 voices, and was last updated 8 years ago by John Moffat.

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January 23, 2018 at 1:14 pm #432437
richardscully
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Hello
The answer appears to be wrong in the answer sheet. They seem to have done Ve+Vd(1-t)/Ve instead of Ve/Ve+Vd(1-t) and the correct equity beta should be .897 and Ke should be 8.3??????
Am I correct? Or did i miss another way to work it out?
January 23, 2018 at 5:35 pm #432493
John Moffat
Keymaster
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No – the answer is correct (and BPP have copied it from the examiners own answer).
To calculate the equity beta you need to use the asset beta formula ‘backwards’.
And think about it – the equity beta will always be higher than the asset beta if there is gearing, because the gearing makes the shares more risky.
March 4, 2018 at 3:19 am #439989
shazmeen
Member
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Hello sir,
For free cash flow in part a) why didnt we deduct tax (20%) after adding fcf and synergy?
March 4, 2018 at 11:15 am #440047
John Moffat
Keymaster
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Free cash flows are, by definition, already after tax.
The question doesn’t make it clear whether the synergy benefits are before or after tax, and so this is an assumption (and as always in P4, provided you state your assumption you will still get the marks).
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