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Tampem Dec 06

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Tampem Dec 06

  • This topic has 5 replies, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • May 7, 2015 at 8:12 pm #244694
    chandhini
    Member
    • Topics: 19
    • Replies: 45
    • ☆☆

    In this question, we are undertaking a project that will change our company’s gearing, which means that the financial risk is affected. So in this case, how can we use the existing equity beta to calculate the cost of equity ( to compute NPV), sir?

    May 7, 2015 at 8:55 pm #244712
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    This is a very old question, and not such a good question.

    It depends how you interpret note (iv) in the question. Because you are told the equity beta of the investment, it must mean that in some way or another the gearing has already been taken into account. The Kaplan answer (which is what I assume you are looking at) assumes that it has taken into account the gearing that will be used.
    To be fair – there is not much else that they could have assumed.

    It is always the equity beta that dictates the cost of equity – the problem is which equity beta 🙂

    May 8, 2015 at 11:58 pm #244858
    chandhini
    Member
    • Topics: 19
    • Replies: 45
    • ☆☆

    Ahan. But sir, the asset beta has been calculated using the given equity beta and the existing gearing ratio, and not the new gearing. So I was thought that the given equity beta relates to the present gearing.
    So if I had used the asset beta attained above to recalculate the equity beta using the new gearing, would that have been right? Or am I missing something here? 🙁

    May 9, 2015 at 9:25 am #244900
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You would have been right 🙂

    May 9, 2015 at 9:58 am #244906
    chandhini
    Member
    • Topics: 19
    • Replies: 45
    • ☆☆

    *I thought

    Oh, alright then sir. Thanks a lot. 🙂

    May 9, 2015 at 10:03 am #244909
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘Tampem Dec 06’ is closed to new replies.

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