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Hello John,
I often get confused which formula to use in between the below two:
1. M&M (with tax)
Or
2. The asset beta formula.Appreciate if you can give me clarity when and under what requirement we use which formula.
Thanks!
I assume by (1) you mean the M&M Proposition 2 formula.
Both approaches actually end up giving the same result, however the one to use depends on the information given.
The M&M formula is rarely relevant in the exam and is only the most efficient way if you are not given the beta’s. If you are given betas then use the asset beta formula.
Both are covered in my free lectures for AFM.
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