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Hi, i have a question regarding calculating cost of equity incase of gearing. how do i know in the exam when do use the M&M proposition 2 or CAPM and assets beta formula. sorry if the questions seems stupid, it is just a little bit confusing
The question will give you hints.
CAPM is used when beta given or when given the risk free rate and the equity risk premium. this may also involve the ungearing and the regearing of betas to adjust for financial risk.
If dividends or cash flows with growth are given DVM or free cash flow model can be used.
The M&M formula is used when the other methods cannot be used and you are given information about company gearing.
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