Proxy beta
A proxy beta provides a starting point when a company undertakes an activity whose business risk differs from its current operations. Select a comparable company with relevant activity and reliable market data. Its equity beta reflects that company's gearing, so a common approach removes the gearing effect to estimate asset beta and then applies the target financing mix to obtain a project equity beta. The result depends on tax, debt-risk and comparability assumptions and is an estimate, not a directly observed project beta.
Worked example
A comparable company's equity beta is 1.5 with equity value $80, debt value $20 and tax of 25%. Assuming zero debt beta, its asset beta is 1.5 × 80/(80 + 20 × 0.75) = approximately 1.263. The analyst then regears this estimate for the project.
Common mistake
Using a comparable company's geared equity beta unchanged when financing mixes differ, or assuming a company with several unrelated activities is a perfect proxy.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |