computing beta used in calculating ke can be trickish.most attimes I get confused whther to only degear or regear or ungear or combination. Can u summarily explain at what point one can use these systems? thanks in advance.
ke is always determined using the beta of the share – the equity (or geared) beta.
However if the gearing changes (or is different from a company in the same business) then they equity beta will change as well (because with more gearing the share becomes more risky – so a higher beta).
When this is happening you need to find out what the beta would be with no gearing (the asset beta) using the formula. The you need to find out what the beta of the share will be with the new gearing (the equity beta) using the same formula the other way round. When you have the equity beta (the beta of the share) then you can calculate ke.
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