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Hi, is there any advice how to know if they are asking to do calculation with ungeared or regeared Beta (financial or business risk)? It is not always clear which one to use.
Calculate Base case NPV as if the company is an all Equity Finance. In that case, you will calculate cost of equity (ungeared) – Keu which you will use as a discount factor.
To calculate the Keu, if you are using CAPM, you will ungear the Equity beta to get the Asset beta of the proxy company.
The Asset beta that you calculate will be used straight to calculate CAPM. No re-gear.
After calculating the Base case NPV, you will then calculate the finance effects – in this case , you will use risk free rate of return.
I think I am right:?
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Hi,
To see whether business/financial risk has changed or, look out for change of business or increased debt in Q.
Step 1. Discount project CF @ Kei and not WACC. Kei can be worked out from Ba in CAPM or Ungear Kei using M+M formula.
Step 2. Add PV of tax saved as result of debt and subsidised loan
Step 3. Deduct cost of issuing new finance.Hope this helps.
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