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hello….can u help on on when to regear and when to degear…am still confused about these?thanks
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In APV you simply need to take the asset beta for use in CAPM. For normal NPV, You need to degear (find asset beta) when comparing the project or private company with a proxy and regear (find equity beta with book values of company with new gearing). Use this beta with CAPM for Ke.
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Just to say, you don’t use the book value, but market value to regear. You degear, when there is a different business risk.
for APV:
Basic assumption to derive Base case NPV, is that Company is 100% equity financed that us Beta equity is used..Gearing and re gearing are used to incorporate the risk of the company to whom you are appraising..
We need to perform such calculations when company enters into diversified business.. as business changes obviously risk is also changed..
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