CAPM is a big part of both the ACCA FM & AFM exams. The equation is not too difficult to use to find the Ke.
However, ascertaining the correct beta is a little more challenging. The beta needs to reflect the appropriate systematic business risk along with the company’s financial risk.
Both exams, provide the same formula to de-gear an equity beta. The equation has to be rearranged to re-gear the asset beta into the new equity beta.
The big difference is how & where this is used in each exam.
In ACCA FM, this process is only tested as part of risk adjusted Ke and no where else.
But, this does not apply in ACCA AFM. In the advanced paper, think of the de-gear & re-gear skill that can be used as and when needed.
For instance, it comes into play when:
1. When the company planning to change its Co WACC by adding or removing a business area.
2. The company is looking to change its debt levels and needs to know the new Ke & Co WACC
3. In APV as the de-gear process is needed to find the asset beta for Kei.
4. In the Risk Adjusted WACC computation.
In FM it’s restricted, but in AFM it is a free agent!