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Hi John
You are unlikely to have this qs. Its in the old kaplan kit. My query is that this is an APV question. They have an “investment equity beta” and investment capital structure 50:50 (debt/equity).
Then they have a company equity beta and company capital structure 60:40.In order to find project specific Ke, they have inserted the investment equity beta directly into the COMPANY capital structure rather than project capital structure, both of which are different. Could please shed some light on why that might be? (Also why equity beta? Shouldn’t they ungear project beta to find asset beta and then just use that?)
Query 2:
In an NPV question, we will always use the cost of capital in the country the cashflows are being remitted to, rather than country they are being remitted from?For the NPV, we use the WACC. They use the investment equity beta to calculate the cost of equity for the project and then use the gearing of the company. That is what we do with NPV, but for the reasons you state it is not a good approach (which is why exam questions are not like this any more – the examiner has changed twice since this question was asked).
For the APV it has been done in the normal way – calculating the cost of equity as though there was no gearing.
Query 2: Yes. It is the cost of capital for the company who is making the decisions as to whether or not to invest.
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