a3 advanced costs of capitalex1q1商业风险加权思想.pdf

However, business risk is specific to a project, so when investing in projects with different business risk a marginal cost of capital (using the CAPM) should be used. It is inappropriate to use the current WACC. Step 1 – find a quoted in that business An equity beta is the beta of a share, and will be an indication of the risk of the business. Step 2 – adjust the beta to reflect differences in gearing In reality an equity beta will be also be affected by a ’s gearing. To understand the level of business risk the equity beta needs to be adjusted by strip out the effect of gearing to create an ungeared or an asset beta – this measures business risk. Step 3 – use the re-geared beta to calculate an appropriate cost of capital Lecture Example TR Co has a gearing level of 1:3 debt : equity. TR is considering diversifying into a new market. B Co is already operating in the new market. B Co has an equity beta of 1.05 and a gearing level of 1:4 debt : equity. Both companies pay 30% corporation tax. The risk rate is 4% and the market premium is 4%. What is TR Co's cost of equity for assessing the decision to diversify into the new market? Answer B Co is being used as a and has a different level of gearing to TR Co. Ungear B Co's equity beta: Regear ßa using TR assumption of a gearing level of 1:3 debt : equity Ex1 –201412Q1 商业风险 的思想 Fugae Co repairs and maintains aircraft engines. Now Fugae Co is considering entering a growing market for luxury travel through a four-year project Although there is no beta for companies offering luxury forms of travel in the tourist industry, Reka Co, a listed , offers passenger transportation services on coaches, trains and luxury vehicles. About 15% of its business is in the luxury transport market and Reka Co’s equity beta is 1·6. It is estimated that the asset beta of the non-l