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.
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Dear Sir,
when discounting cash flows to calculate APV, why is it that in Fubuki we calculated the ungeared cost of equity while in Burung we just calculated the cost of equity using CAPM?
In APV we always discount at the ungeared cost of equity.
Burung has used the ungeared cost of equity. If there is no gearing, then the equity beta is equal to the asset beta (the only reason they are ever different is because of gearing).
So they have calculated the asset beta. This is equal to the equity beta and it is the equity beta that determines the cost of equity.- Topics: 16
- Replies: 38
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So using asset beta in CAPM would yield the same result as when calculating the ungeared cost of equity using the Modigliani & Miller Proposition 2 (with tax) formulae in the formulae sheet and it all depends on what variables we are given in the exam?
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Thank you very much sir 🙂
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