CIMA F3 Exam With Confidence Using Practice Dumps

13%1. De-gear GGG’s equity beta to get its asset betaGGG’s data:Equity beta βe=2.4\beta_e = 2.4βe​=2.4Gearing D/E=1D/E = 1D/E=1 (market values)Tax rate T=20%T = 20\%T=20%Formula:βa=βe1+(1−T)DE\beta_a = \frac{\beta_e}{1 + (1-T)\frac{D}{E}}βa​=1+(1−T)ED​βe​​ βa=2.41+0.8×1=2.41.8=43≈1.33\beta_a = \frac{2.4}{1 + 0.8 \times 1} = \frac{2.4}{1.8} = \frac{4}{3} \approx 1.33βa​=1+0.8×12.4​=1.82.4​=34​≈1.33 This asset beta represents the business risk of electric scooters.2. Re-gear for ART’s capital structureART is and will remain all-equity financed, so for the project:βproject=βa≈1.33\beta_{\text{project}} = \beta_a \approx 1.33βproject​=βa​≈1.33 3. Use CAPM to get the discount rateGiven:Risk-free rate Rf=5%R_f = 5\%Rf​=5%Market risk premium (Rm−Rf)=6%(R_m - R_f) = 6\%(Rm​−Rf​)=6%Required return=Rf+βproject(Rm−Rf)=5%+1.33×6%=5%+8%=13%\text{Required return} = R_f + \beta_{\text{project}}(R_m - R_f) = 5\% + 1.33 \times 6\% = 5\% + 8\% = 13\%Required return=Rf​+βproject​(Rm​−Rf​)=5%+1.33×6%=5%+8%=13% Recommended discount rate (nearest whole %): 13%

ACutting a dividend is often interpreted by investors as management signalling weaker future prospects, so they may mark the share price down. The concern that a dividend cut will reduce the share price reflects the signalling effect of dividends.