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M&M formula

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › M&M formula

  • This topic has 1 reply, 2 voices, and was last updated 10 months ago by John Moffat.
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  • September 1, 2021 at 3:51 pm #633809
    ranganaherath
    • Topics: 24
    • Replies: 127
    • ☆☆

    Hi sir,

    In this lecture,
    https://youtu.be/MgSX3BmO1k0

    You mention that we can arrive at the same ungeared cost of equity either by using asset beta or the M&M formula

    I tried it for the same example but I was not able to, could you please show how we can arrive at the answer using the same example or explain as to why it was not possible and also how to decide which method to use during the exam?

    Edit – This is because in the video you mention we can calculate the beta however in the example we are not given a market risk premium

    TIA 🙂

    September 1, 2021 at 7:06 pm #633848
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49603
    • ☆☆☆☆☆

    To show it would be wasting my time and more importantly your time!!

    It means using algebra and although the risk free rate is not given you can use a symbol for this and then use the algebra.

    You will just have to trust me – both formula come from the same theory.

    In the exam if you are given betas (as is usually the case) then use the betas. If you are not given betas then you need to use the MM formula 🙂

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