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December 2013 -Q3(a)

This topic has 1 reply, 2 voices, and was last updated 10 years ago by John Moffat.

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November 27, 2014 at 8:21 am #213694
aysel
Member
- Topics: 1
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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?
November 27, 2014 at 10:46 am #213726
John Moffat
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- Topics: 57
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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).
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