Asset and equity beta

Equity beta represents the systematic business risk and financial risk of a company, and asset beta reflects only the business risk of a company. If a company is all equity financed, the equity beta is exactly equal to asset beta. 
As long as a company operates in its existing business, its asset beta remains constant. However, the equity beta will change as company’s gearing (financial risk) change, the higher gearing ratio, the higher equity beta. 

Step1: calculate the beta asset (business risk) of company by degearing the beta equity. 
In this step, the beta asset is unknown variable, and Debt and Equity is used the market value before the gearing changed. 
If you are not given beta debt, we normally assume beta debt is zero 

Step 2: calculate the new beta equity by regearing the new debt / equity ratio, the formulae is same but the beta equity is unknown variable 
The Debt and Equity is used the new gearing ratio after company adjusting its capital structure. 

Step 3: calculating the cost of equity (Ke) by using CAPM model 

Step 4: Estimate cost of debt (Kd) at new gearing ratio. We should note that the cost of debt may rise if gearing ratio increase, as company’s credit rating may fall under a higher gearing ratio and debtholders require higher return. 

Step 5: Calculating the WACC under a new gearing ratio. 

Very clearly explained 🙂

Firstly, the asset beta formula is actually M&M and so they both will give the same answer.

The MM formula for getting the cost of equity of a geared company is not often relevant in the exam but is easier when you are not given the betas (because otherwise, you have to calculate the beta from the cost of equity and then use the asset beta formula, which takes longer).