Dear Sir,
i am reading BPP book, revision kit. In question 76, Trosoft, when we use CAPM to calculate k(eu) the formula: k(eu) = risk free rate + market risk premium x asset beta.
Question: why do we use asset beta to calculate k(eu) ? why is it not equity beta?.
it is the same for question 25, Burung Co.
thanks,
ACCA Forums
AFMCost of equity
10y ago#1I will answer, but in future you must ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other.
The equity beta measures the risk of a share, and the only reason that it is higher than the asset beta is because of the gearing risk.
If there is no gearing, then the equity beta equals the asset beta.
Keu is the cost of equity in an ungeared company and therefore, again, the equity beta is equal to the asset beta.
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