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Can i know whether we will be given beta of compnay in the question definitely? do we have to calculate beta ourselves?
If betas are relevant then you will always either be given it, or you will be given the beta of a similar company and you will use that (ungeared, obviously, if necessary).
Dear Tutor,
Just to shed more light on this (understood but no harm clarifying further i guess). You have responded in most of the post that the Beta of Equity will always be used to get the Ke (except all Equity Financed)
Once we use the asset beta of a proxy company given (even if the gearing of the project does not change), so far the capital structure of the company has debt and equity, we will always Re-gear using the existing gearing ratio to get the Beta for Equity? , hence reflect the risk to shareholders.
I am just comparing to your lectures on ‘The Impact of Financing Example 1 & 2’.
Yes – we always use the beta of equity to get the cost of equity.
Yes – we regear the asset beta to get the equity beta when necessary.But remember, if you are asked to calculate the APV (adjusted present value) then you calculate the base case NPV as though all equity financed so then you don’t need to regear the beta.
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