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Hi there
Please advise what should have been my thought process calculating the WACC after proposal. I did not weight the asset betas and did not do an equity beta calculation
Also why are we unable to use the figures from the balance sheet as a market value?
When two streams of different risks are combined, then the overall beta is the weighted average of the individual betas.
Equity betas measure the riskiness of a share in the business, which is due both to the risk of the business itself and to the level of gearing in the business. The asset beta measures purely the risk of the business, so to find the equity beta (and it is this that determines the cost of equity) we need to adjust for the gearing using the equity beta formula.
My lectures on CAPM should help you with both of these points.
With regard to the Statement of financial position (it is no longer called Balance Sheet 🙂 ) the values there are nominal values and are never the market values of debt and equity.
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