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Theoretically, the capital asset pricing model (CAPM) can be used to determine a project-specific discount
rate which reflects an investment project’s systematic risk. This means selecting a proxy company with
similar business activities to a proposed investment project, ungearing the proxy company equity beta to
give an asset beta which does not reflect the proxy company financial risk, regearing the asset beta to give
an equity beta which reflects the financial risk of the investing company, and using the CAPM to calculate a
project-specific cost of equity for the investment project.Could you please help me understand the above as I am unable to comprehend it ?
There is too much for me to explain it all here – it would mean my typing out all my lectures 🙂
However, it is stating just what I explain in my lectures working through Chapter 21 of our free lecture notes. I explain how we calculate the project specific cost equity and the relevance of it.
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