In the video how do use CAPM to get the same answer 16.96 ie the answer of part a example 1. I tried using the formula with a random return to market but failed to get the same answer. Please help out with your solution with using a random number as your return to market
Question refered is from the lecture notes of AFM Example 1
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THE IMPACT OF FINANCING (PART 1)
7y ago#1But you seem to have answered your own question in your post under the lecture :-)
"This is what i did…
I took/assumed return to market as 9%
As we know the ungeared cost of equity (in the question). We can find out the beta.
15%(Ke ungeared) = 8% + beta (9%-8%)
ungeared equity beta = 7
equity beta is equal to asset beta as it was ungeared
Be=Ba = 7
using Ba formula – to find out what the Be
ungeared beta we know to be as 7. What we want is geared equity Beta to later calculate the geared cost of equity.
7=1/1+0.4(1-0.3)*Be
7=0.78125*Be
7/0.78125=Be Be=8.96
Now i applied the new Be to the CAPM formula
Ke = 8% + 8.96(9%-8%) =16.96
Then we can use WACC…and get the same answer!"
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