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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › beta in Capital Asset Pricing Model
hi, do we use geared or ungeared beta in this formula? Or it depends on how company/project is financed?
You always use the equity beta (geared beta) to calculate the cost of equity.
I have seen in other examples asset beta, and it confuses me.
You would only use the asset beta to calculate the cost of equity if there was no gearing. If there is no gearing, then the equity beta equals the asset beta.
If you are confused in any past exam questions then let me know which ones and I will explain where you are going wrong.
(I assume that you were asking about the CAPM formula, and not the asset beta formula!)
Thank you John, that’s probably is the same what I mentioned. I should use word geared and not financed. So I use ungeared beta in CAPM formula only if all equity financed, right?
Thats correct 🙂
Hi John Moffat, you have mentioned that we only use equity beta if ‘ there is no gearing ‘
‘ there is no gearing ‘ means when then investment is financed 50% equity and 50% debt ?
If not what is it mean by ‘no gearing ‘ ? Doesn’t always the company has gearing ratio ?
No gearing means that the company is 100% financed from equity.
A company only has gearing when there is debt finance involved.
Do watch my free lectures (and if necessary the relevant Paper F9 lectures where gearing is discussed).