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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › December 2013 -Q3(a)
Hello, the question is following. Then we calculate beta for use in CAPM, at first we calculate combined entity beta asset as average beta asset weighted by proportion of firms equity. Why do we use this beta asset of combined entity to calculate Ke and do not at first regear this beta asset to reflect the combined entity gearing?
The cost of equity is always determined by the equity beta (never by the asset beta, unless there is no gearing in which case the equity beta will equal the asset beta).