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Hi,
In many of the answers provided in past year papers, it always says “if the BUSINESS RISK changes as a result of an investment project, a project specific discount rate should be calculated”.
They never mentioned about the financial risk.
What about the FINANCIAL RISK? If the financial risk changes, then do we also use CAPM to calculate a project specific cost of equity which can be used in calculating project specific WACC?
Based on my understanding, the current WACC can only be used if the business and financial risk remained unchanged.
We would take the gearing into account, but that is not in the syllabus for Paper FM (it is not dealt with until Paper AFM).
For Paper FM you can only be asked to calculated the project specific cost of equity.
Is it right to say,
“CAPM can help to calculate a project specific cost of equity if the BUSINESS risk and the FINANCIAL risk change”?
With the financial risk included?
We use CAPM to calculate the project specific cost of equity if either or both of the business risk and gearing risk change.
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