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To adjust the PV of any project, the cash flows must firstly be discounted using an ungeared cost of equity. This can be computed using the M&M formula or the asset beta.
Sir, in the exam, can we choose which method to use of will the question direct us in this regard?
The question will not direct you as to which method to use. Most times (but not every time) you are given information about the betas (and the risk free rate) in which case use betas (which will almost certainly involve using the asset beta formula to ungear the beta).
If you are not given the betas then use the M&M formula that appears at the top of the formula sheet.
In fact, both approaches will give the same end result (because the asset beta formula comes from M&M). You might not believe me but it is true although please don’t waste your time doing it both ways to check me – I am telling the truth 🙂
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