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Hi tutor
Can u please tell me when do we ungear beta and when do we ungear ke?If we are unbundling or acquiring? What cost of capital should be used for discounting?
The ungeared Ke is needed for APV calculations.
The ungeared beta (i.e. the asset beta) is needed either to get the ungeared Ke (for APV calculations) or to be able to find the new cost of equity if the gearing has changed. (Ungear the current beta to get the asset beta, and then regear the beta to get the new equity beta which determines the new cost of equity).
If you are actually asking about when to use which formula (the asset beta formula or the MM formula) then in fact you could always use either (one formula is derived from the other). However as far as the exam is concerned it is virtually always the asset beta formula that is the relevant one (I can only remember one occasion when the MM formula was of use).
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