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Dear John,
I rather confused two risk factors due to
in APV method, we need to find out the cost of Equity to discount the FCFE, we use the CAPM to calculate the ke with Equity beta, in case the Company have debts and the Equity beta should be ungeared prior to apply to the CAPM formula, is it make sense, pls. clarify
In APV we discount the project at the cost of equity as if there was no gearing (and then add on the tax benefit on the debt raised).
To get the cost of equity if there is no gearing we use the asset beta (because the equity beta will equal the asset beta if there is no gearing).
If we are given the equity beta of a geared company (which is usually the case) then we need to ungear it in order to get the asset beta which we are going to use in my previous sentence.
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