Sample question in the Student Accountant article

In short….
Staccato innovations’ (SIC)’s Beta needs to be degeared. This is because they were already in the business whereas ATC are new to it so ATC are diversifying into components – ergo use SIC’s Beta

(I missed that when I did it… i would have overlooked it completely – I used the Betas that were there. Question is WAY too long to finish in the time anyway it seems)

Anyway:

The asset (degeared) Beta is then REgeared using ATC’s gearing giving the equity Beta that needs to be put into the CAPM for Ke.

The gearings are worked out:
Equity = Market value
Debt = Market value

If you don’t get the market values, you’ll be using the wrong percentages to put into the WACC weighted averaging formula.
(% equity)+(% debt)

(NOTE – for the CAPM – you are not given the average return, you are given the equity risk premium)