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As we all know that when a Co intends to enter into a new industry we are required to calculate the risk adjusted WACC. For this purpose we calculate the Beta Asset of that industry and then regear it with our Co’s financial gearing to calculate the Risk adjusted Beta Equity in order to compute the new Ke and ultimately WACC.
Beta Asset represents the Business Risk faced by the Co. in that industry. My query is that why don’t we calculate the Proxy Beta Asset as the Co. is already doing business in some other industry. So it must be facing some Business Risk in that industry and is bound to have a Beta Asset of its existing industry.You forgot to say that before “regearing” the company for new industry it intends to enter, we “degear” it for its current industry (say Engineering). This is so to eliminate the previous risk profile and assume the new one in order to culculate the beta asset of the company in the new industry (say Property).
You cannot then continue to use its prevous asset beta as a proxy as you are weighing the options of getting into the new industry. so you will have to choose a company operating in the new industry for a proxy.
Unltimately, there will be a new WACC for the company which incorporates its entry into the new industry.
Did I get you correctly?
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