- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
.
Viewing 2 posts - 1 through 2 (of 2 total)
- Posts
Dear Sir,
In the question Intergrand, part a, we have the equity beta at 1.4 already so can we use this equity beta to estimate the cost of equity (ke = 4% + (11% – 4%)*1.4 = 13.8%)? In the solution, the calculation is complicated and different result.
Thanks,
DTThe question asks for you to use an APV approach.
Therefore we need to discount at what the cost of equity would be if it were all equity financed. Currently it is geared and therefore the current beta of the equity includes the gearing effect.
If it were able equity financed then the equity beta will be the same as the asset beta and therefore we need to use the asset beta formula to ungear the beta in order to calculate the relevant cost of equity.
Viewing 2 posts - 1 through 2 (of 2 total)
- You must be logged in to reply to this topic.