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Regarding capm

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Regarding capm

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • July 12, 2022 at 1:02 pm #660336
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    sir suppose company A is about to invest in company B and is raising finance via equity under capm to find the cost of equity do we need to get the Beta for B or A to find the required return. or in other words to calculate the return required by share holder do we use beta of investment company or the beta of investor copmany

    July 13, 2022 at 8:24 am #660374
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    The beta of company B, because it is the risk of the investment that determines the return required.

    July 14, 2022 at 3:00 am #660439
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    So sir one of the assumption for wacc was no change in risk(of the project or has the same level of risk as the company) however now since we are able to calculate effectively calculate return required for the change risk does this assumption still stand?(capm model)

    July 14, 2022 at 9:10 am #660449
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    When using the WACC we are assuming no change in the level of gearing and no change in the level of business risk.

    If either of the two do change then we do not use the WACC (although it is not until Paper AFM that these changes are examined in full. All that can be asked in Paper FM is the project specific. cost of equity, as explained in my lectures.)

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