Fubuki (12/10) — OpenTuition Forums

Jjason9112y ago

Hello and good day to you, I do not understand how to calculate the discount factor in this question to use in the APV calculation. I understand that there are 2 ways i can calculate this. However, i prefer to calculate it by ungearing the Asset Beta and then using that to find the cost of equity. Can you please show me how i can solve this problem by using the ungearing of the asset beta method? Regards

John MoffatTutor12y ago#1

You don't ungear the asset beta - you ungear the equity beta. Cost of equity at the moment is 14%. So 14% = 4.5% + Beta equity x 4% So Beta equity = 2.375 Asset beta = (37.95 / (37.95 + (37.952 x 0.7))) x 2.375 = 1.397 So......cost of equity (all equity) = 4.5% + (1.397 x 4%) = 10.09% (the answer is marginally different, but that is rounding)

Jjason9112y ago#2

Thanks soo much Sir - i understand it now! :) PS: Apologies for asking the same question twice

John MoffatTutor12y ago#3

You are welcome :-)