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question about the calculation of discounted rate about hotel purchase and cal. APV in this question.
firstly, i need to find the ke for the project using degear and regear method. however, the question doesnt quote the proxy company beta. Only have daron’s equity beta 1.25.
in the answer, it un-gear this equity beta to find the asset beta.
On my understanding the hotel industry is not core – business of Daron, why use Daron’s equtiy beta?
thank you very much and appreciate.
I read the question again. I find the question to state the hint in last sentence ” the systematic risk of operating the hotels is believed to be similar to that of the company;s exisiting operation.
the reason I use equity beta to be ungeared and using capm to find the cost of capital in new project.
does it correct of my approach?
thank you very much.
That is correct. For APV you discount the project at the rate given by the projects asset beta. You get the asset beta by ungearing the equity beta of a company in the same business as the project.
Hi John, the question says that working capital will remain constant after the year 20X8.
In the answer the working capital for the year 20X9-Y3 is zero. Shouldn’t the working capital be $3?
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