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John Moffat.
John Moffat.-
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dennissherpa101
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sir suppose company A is about to invest in company B and is raising finance via equity under capm to find the cost of equity do we need to get the Beta for B or A to find the required return. or in other words to calculate the return required by share holder do we use beta of investment company or the beta of investor copmany
John Moffat
- Topics: 57
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The beta of company B, because it is the risk of the investment that determines the return required.
dennissherpa101
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So sir one of the assumption for wacc was no change in risk(of the project or has the same level of risk as the company) however now since we are able to calculate effectively calculate return required for the change risk does this assumption still stand?(capm model)
John Moffat
- Topics: 57
- Replies: 50034
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When using the WACC we are assuming no change in the level of gearing and no change in the level of business risk.
If either of the two do change then we do not use the WACC (although it is not until Paper AFM that these changes are examined in full. All that can be asked in Paper FM is the project specific. cost of equity, as explained in my lectures.)
dennissherpa101
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