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In part b) when calculating the effect of the redemption of the existing debt on the co.’s Kd Ke and WACC
Is it ok to first ungear the Ke of the company and then regear it with the new gearing level to get a new equity beta then plug it into the CAPM?
Thanks alot Sir
I really appreciate your help
How do you intend to ungear Ke, and if you do, then why on earth do you need a new beta to put into CAPM???
The beta given is the current equity beta.
You need to ungear the equity beta to get the asset beta, and then rehear the asset beta with the new gearing to get the new equity beta.
When you have the new equity beta you can calculate the new Ke using the CAPM formula.
Thats what im also saying
So we will have to insert the New equity beta in the CAPM ryt?isnt it what ur saying?Actually, that is not what you said – you wrote about ungearing Ke and then getting an equity beta.
However, with the change in gearing you do use the new equity beta to calculate the new cost of equity, and then calculate the WACC as normal.
This is exactly what the examiners answer does 🙂
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