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Hello Sir
In the past exam, Dec 2014 Q1 requirement (c) (ii) asked to estimate the additional value of the luxury transport project to Fugae Co. In the calculation of the cash flows of the project, equity beta was taken into the project. I don’t understand why we take the equity beta. According to my understanding, when the new investment in a different industry we take the asset beta (the business risk is changed), when the new investment in a different industry and have new funding we take equity beta (as the business and financial risks are changed), such as we calculate the APV. But here, in this question, I have not read any information about the financial risk is changed, so why we should take equity beta in this question?Thank you
Because there is no change in the gearing, we discount the new project at the WACC. However because of the different level of business risk we calculate the WACC for the project using the cost of equity and cost of debt as normal, but the cost of equity will be different because of the new level of business risk.
You can find lectures working through the whole of this question linked from the following page:
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