Question 1

**Section A**

CyberShield Inc, a software company, is pivoting to hardware manufacturing. To find an appropriate discount rate, it looks at a proxy hardware company, HardTech PLC.

HardTech PLC has an equity beta of 1.5. Its capital structure is 60% equity and 40% debt by market value. The corporate tax rate is 25%.

Assuming debt is risk-free (debt beta is zero), what is the asset beta of HardTech PLC?

Accepted Answer

Use the asset beta formula (un-gearing formula): βa = βe × [Ve / (Ve + Vd(1-T))]. Substitute the given values: βe = 1.5, Ve = 60, Vd = 40, T = 0.25.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to apply the tax rate to the debt value, which would result in 1.5 * (60/100) = 0.90.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

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