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TAMPEM INC DEC 06

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › TAMPEM INC DEC 06

  • This topic has 5 replies, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • June 6, 2017 at 5:40 am #390755
    raahulshah
    Member
    • Topics: 6
    • Replies: 24
    • ☆

    Hey John,
    When calculating WACC for NPV they have used expected gearing after investment. (ve= 0.6 vd=0.4)

    But when calculating Beta asset for ungeared cost of equity for the purpose of base case NPV they have used the amount of investment for the value of equity and debt. (ve=vd=2700 or 0.5)

    My question is which value of equity and debt to be used in WACC and in Beta asset for ungeared cost of equity.

    June 6, 2017 at 8:12 am #390782
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    When calculating the WACC for the NPV calculation we should use the actual gearing that will exist (i.e. 60% / 40%).

    However, when using the APV approach we should use the actual gearing that will existing in the project itself, which is 50%/50% per note (ii) of the question.

    (This is an old question – the examiner has changed twice since then, and the current examiner doesn’t appear to play ‘tricks’ like this.)

    June 6, 2017 at 9:47 am #390817
    raahulshah
    Member
    • Topics: 6
    • Replies: 24
    • ☆

    “However, when using the APV approach we should use the actual gearing that will existing in the project itself”

    I saw a question of APV where the project will be financed entirely by convertible debentures. So as per the above logic, the value of equity will be 0 isn’t it ? ?
    But they have used the existing debt n equity .

    June 6, 2017 at 6:14 pm #391005
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Not at all.

    With APV you always discount at whatever the cost of equity would be if there was no gearing.

    What you asked before was what gearing to use in the asset beta formula in order to be able to find the relevant beta and therefore the relevant cost of equity.

    I do suggest that you watch my free lectures on this.

    June 7, 2017 at 2:58 am #391117
    raahulshah
    Member
    • Topics: 6
    • Replies: 24
    • ☆

    Sure thanks 🙂

    June 7, 2017 at 7:17 am #391184
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

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

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