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Dear sir, in example 6 of chapter 8(lecture notes) we are planning taking on a project of ship buliding. suppose shipbuilding company is a separate company with its own gearing. and its unlisted hence werefer to company Y to finds its Beta asset(systematic risk). futher more if we were to take the project with its own gearing financing with debt. whos gearing would be apply to the formula?
I have gone through the lectures several times Thank you. Please please clear this confusion for me.We calculate the asset beta of Y because it is in the same business as the project we are investing in (nothing to do with being listed or not). If there is gearing in the project then we take the project gearing in order to calculate an equity beta for the project so as to be able to calculate a cost of equity for the project and then a WACC for the project.
However much more likely in the exam, we would be asked take an adjusted present value approach which would mean using the asset beta from the similar company to calculate a cost of equity for the project assuming no gearing, discount at this rate, and then add on the tax benefit of the debt used to finance the project.
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