Asset Beta and Equity Beta

Company beta usually is Equity Beta i.e Be (unless is stated in the question). Equity beta is geared beta (capital structure of equity and debt with risk).

With regard to un-gearing and re-gearing …

Usually, in the EXAM, the order is DE-GEAR the beta you have been given in the question in order to remove the financial risk element. Now you only have the business risk element left … this now reflects the risk of the industry that the company operates in, i.e this is the asset or un-geared beta.

If the new project is to be in the SAME industry then all you have to do is RE-GEAR the asset or industry beta calculated above using the debt equity mix of the new project.

But, if the new project is to be in a new industry then your starting point will have to involve finding that particular asset or industry beta – usually by DE-GEARING the EQUITY beta of a similar company within the industry of the new project. Once you have found the new asset or ungeared beta in this way then once again you will have to RE-GEAR it in order to add in the Financial Risk element in accordance with how the new project is to be financed (ie the D/E mix).

Let me summarise the key rules for this part of the syllabus….

What if the conditions for using the WACC as the DF in Investment Appraisal are not met?

Answer: Calculate a New Project specific WACC

(1) Calculate the effect of the Financial Risk (Gearing) change => M&M
(2) Calculate the effect of the Business Risk change => CAPM

Procedure:

(1) Un-Gear company (EQUITY) Beta given in question in order to find the Business Risk element => the Industry Beta of the new Project
(2) Re-Gear Beta to incorporate the Financial Risk of the new Project
(3) Calculate the New Project Specific WACC

https://opentuition.com/groups/ask-the-tutor-acca-f9-exams/forum/topic/gear-and-re-gear-asset-beta/