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      • avatar says

        Ok thanks……….but re-gear using the company’s capital structure / the project intended capital structure?

        Also,this lecture was able to break down the essence of ungearing.please can you help me out with the simplistic reason for re-gearing?

      • Profile photo of John Moffat says

        We ungear a similar company to find the riskiness of the business and therefore the project (the asset beta).

        To appraise the project we also need to take into account the gearing of the project (because the gearing in the project will make the equity more risky), so we need to regear the beta to get the equity beta.

        If it is a normal NPV question, then we need to discount at the WACC. We usually assume that the gearing of the project will be the same as that currently existing in the company, so you regear the beta to get the equity beta. Use this to get the cost of equity. Then calculate a WACC for the project in the normal way.

        If you are being asked for the APV, then regearing is not relevant (because the base case NPV assumes all equity and we are dealing with the gearing separately).

        I hope that all makes sense :-)

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