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Hi, in the tampem question they have ungeared the equity beta for calculation of base case npv(for APV) with the project gearing ratio i.e 50% debt 50% equity, but in the Neptune question they have used the current company gearing ratio rather than project specific gearing which it says project will be financed by bond issue, so shouldn’t be 100% debt shoukd be used as gearing ration when degearing equity beta?
Can you please explain why the difference?
To ungear the current equity beta we should use the current gearing. It is the current gearing that makes the equity more risky that it otherwise would be.
What has been done in Neptune is correct.
The difference in the Tampem question is that you are not given the current equity beta of the company (if you were you would use the current gearing of the company to ungear it).
What you are given in Tampem is the investment equity beta, and so to ungear it you use the gearing of the investment.
(Tampem was actually a very odd question set by an examiner before the one before the current examiner 🙂 A question like Neptune is far more likely if APV is asked.)I guess I know, this investment amount include working capital 0.6m and issue cost 0.4m hence we need to deduct to get 4.4m. Thanks anyway
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