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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
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 = 2.375Asset 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)Thanks soo much Sir – i understand it now! 🙂
PS: Apologies for asking the same question twice
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