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As i have seen some previous response from other students, you have mentioned that we use equity beta for the beta factor
however in the past paper 2006 DECEMBER, TAMPEM INC, for the part (a), when they calculate the discount rate for the APV, why do they use beta asset for calculating discount rate of APV ??? i thought we only use equity beta for the beta factor ( for discounting purposes)
“beta” and “beta factor” are the same thing, so your first sentence makes no sense (and I have never written that!!).
The equity beta is used to determine the cost of equity.
With APV we first calculate the base case NPV as though the company was entirely equity financed (and then add on later the tax benefit of the debt). If a company is entirely equity financed then the equity beta is equal to the asset beta.
This is all explained in my free lectures on APV.
That means if company isn’t entirely equity financed, then we still us equity beta to determine cost of equity whether it is NPV, or APV etc ?
It is always the equity beta that determines the cost of equity!!!
If we are calculating the APV then for the base case NPV we use the equity beta if it were all equity financed, which would then be equal to the asset beta.
For a normal NPV calculation we use the actual equity beta (which obviously will be higher than the asset beta) to calculate the cost of equity which we then use in the WACC calculation.
Again, please watch my free lectures on CAPM and on APV.
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