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Revision note, pg 32& 33, the MM theory

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Revision note, pg 32& 33, the MM theory

  • This topic has 5 replies, 2 voices, and was last updated 9 years ago by AvatarJohn Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
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  • November 26, 2016 at 6:25 am #351539
    Avatarcyh
    Member
    • Topics: 26
    • Replies: 42
    • ☆☆

    Hi Sir, i refer to you Revision note, pg 32& 33 regrading the MM theory and the example.

    Company raised more debt and the gearing ratio change to 80% (debt to quity)

    i am a bit confused with the gearing ratio.
    since it meantioned gearing ratio change to 80% (debt to quity).

    the market value of equity should be 100
    the market value of debt should be 80
    so total market value is 180

    but how come the answer of new WACC, the total market value is 80+20, not 100+80 ?

    AND,

    in MM formula, the Cost of debt is always refer to risk free debt?

    November 26, 2016 at 11:04 am #351604
    AvatarJohn Moffat
    Keymaster
    • Topics: 57
    • Replies: 54845
    • ☆☆☆☆☆

    The answer in the notes is wrong, and I must correct it.

    However the lecture working through the example is completely correct.

    November 26, 2016 at 1:55 pm #351642
    Avatarcyh
    Member
    • Topics: 26
    • Replies: 42
    • ☆☆

    so the total market value should be $100+80,
    new Ke is 22.63%
    new WACC is 13.9%

    am i right?

    November 26, 2016 at 3:11 pm #351673
    AvatarJohn Moffat
    Keymaster
    • Topics: 57
    • Replies: 54845
    • ☆☆☆☆☆

    Correct 🙂

    November 26, 2016 at 3:16 pm #351677
    Avatarcyh
    Member
    • Topics: 26
    • Replies: 42
    • ☆☆

    i noticed that in page 50, example 2 answer also got same problem : gearing ratio

    November 26, 2016 at 3:23 pm #351682
    AvatarJohn Moffat
    Keymaster
    • Topics: 57
    • Replies: 54845
    • ☆☆☆☆☆

    Maybe, I will check. I must remove the revision notes anyway, because it is the main notes and lectures that are important, and they certainly are correct 🙂

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