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Hi, tutor:
it seems that the only difference between them is the (1-Tax). (1-tax) is included when calculating Asset beta, but not in overall Beta (Wacc beta). Can you help clarifying the meaning of the 2 beta? why are they calculated in their different ways? Thanks!
“WACC beta” is not a standard term and although you can calculate an average beta there is never a need to.
The reason that shares are risky is due to the riskiness of the business, if there is gearing in the company, then this makes the share even more risky.
The equity beta measures the total riskiness of the share, and it is the equity beta that determines the shareholders required rate of return (and therefore the cost of equity).
The asset beta measures the riskiness just of the business (without any gearing).
So….if, for example, you know the asset beta of a project and the project is being financed partly by equity and partly be debt, then you need to do the following:
Calculate the equity beta (using the asset beta formula and the gearing in the project)
Use the equity beta to calculate the cost of equity.
Calculate the cost of debt (as normal – IRR if redeembale debt)
The calculate the WACC.
Thank you so much! Your clarification is clear and easy to understand, really valuable for the self-learners
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