MyCIMA

F3 - Exam Practice Kit - Calculation Error?

Posted: Tuesday 26 October 2010
Replies : 2
Category: Studying CIMA

Question asked by:

Atul Bhide - view profile

F3 - Exam Practice Kit, Chapter - 4, Question - 4 REM - a(iii)

In the formula,

Ke = rf + ( rm - rf ) Beta

Beta here should be Equity Beta ( 1.09 ) and not Asset Beta ( 0.96 )

Can any one confirm please which Beta value should be used?

Thanks and regards

Atul Bhide

It's correct

Posted by Homan Mahmoudi on Tuesday 26 October 2010 20:36
In order to calculate the discount rate you have to work out the beta ungeared (shown in part ii). Then you have to use the ungeared beta and put it into the capm model to get the cost of equity ungeared. Then you have to work out the cost of equity adjusted. It does work, they just try to confuse you by making you work out the cost of equity geared. Hope that helps

Thanks

Posted by Atul Bhide on Wednesday 27 October 2010 05:10

Thanks a lot Homan

This will help me in exam.

Atul