Comments on: F9 Revision http://www.accarevision.co.uk/f9-revision-question/ LSBF ACCA Revision Course – Special offers from LSBF for ACCA students Thu, 14 May 2009 07:00:29 +0000 hourly 1 http://wordpress.org/?v=3.6 By: Tewabech http://www.accarevision.co.uk/f9-revision-question/comment-page-1/#comment-71 Tewabech Tue, 12 May 2009 07:58:29 +0000 http://www.accarevision.co.uk/?p=164#comment-71 The examiner removed the debt beta based on the assumption of the company is financed fully form the internal source or equity so only the company exposed to business risk.whereas if the assumption is changed with that of having a loan financing that should have debt beta

]]> By: Kodwo Armah http://www.accarevision.co.uk/f9-revision-question/comment-page-1/#comment-21 Kodwo Armah Thu, 30 Apr 2009 19:43:57 +0000 http://www.accarevision.co.uk/?p=164#comment-21 The Examiner believes that the debt beta does not need to have a value when calculating a project-specific discount rate due to reasons some of which he alludes to in his articles on the Capital Asset Pricing Model:
• First and foremost the examiner believes that to calculate project specific discount rates, it is necessary to remove the effect of the financial risk or gearing from each proxy beta to find the project specific beta, which reflects business risk alone. Hence the debt beta is assumed to be zero. If a company has no debt, it has no financial risk and its beta value reflects business risk alone.

• The examiner regards the original asset beta formula to be somewhat complicated and so he goes with the common practice to make a simplifying assumption that the debt beta is zero.
He considers the above simplification as a relatively minor one since debt beta is very small in comparison to equity beta.

• In addition, he believes the market value of a company’s debt is usually very small in comparison to the market value of its equity and the tax efficiency of debt reduces the weighting of the debt beta further

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