Gearing/Ungearing question — OpenTuition Forums

CChiken14y ago

in the open tuition notes, for chapter 21(CAPM n MM combined) Eg:2 (page 115), we calculate the discount rate/project specific discount rate by ungearing the B of a similar company via the asset B formula…
However i remember seeing a LSBF lecture where we ungeared the B of the similar company then and then re-geared it back for our company using that answer.. This value (regeared) was then used in the CAPM formula to give the project specific discount rate.. WHAT AM I MISSING?

John MoffatTutor14y ago#1

If the project is all equity financed, then the ungeared beta gives the cost of equity (which is the discount rate).

However, if there is gearing in the project then the beta needs regearing to get the equity beta and thus the cost of equity, which you then use to calculate a WACC for the project.

CChiken14y ago#2

@johnmoffat said:
If the project is all equity financed, then the ungeared beta gives the cost of equity (which is the discount rate).
However, if there is gearing in the project then the beta needs regearing to get the equity beta and thus the cost of equity, which you then use to calculate a WACC for the project.

Ohhh ok thanks, so am i safe to assume that, the OT way is more valid as in the f9 exam we will only be financing the project via equity only!?or can there be a situation where we finance fully or partly by debt!?

John MoffatTutor14y ago#3

It is possible that he will ask for the situation where it is financed partly by equity and partly by debt. If he does then almost certainly the financing will be in the same ratio as that already existing in the company.

CChiken14y ago#4

Ok thanks :)

John MoffatTutor14y ago#5

You are welcome :)

Former user14y ago#6

@ John Moffat....Sir i found your lecture with respect to WACC Very helpful.....
thank u very much.....
sir this is my 2nd attempt.... in 1st attempt i got 42%....
any tip that u would like to give me to get through this paper this tyme.....
i would love to hear from u .....

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