I am thoroughly confused about when you should ungear and regear betas. When a beta is already given in a question, how do you know whether to use that one or if you have to ungear it. I didn't do F9 so am struggling with this part of P4. Any help would be appreciated. Thx

Hi
When a busines is trying to expand by taking over a different industry you need to calculate betas to assesss the likely risk of the business and associate this risk into parent companies risk.
Calcaultion of WACC for this type of diversification requires the risk to to be revised by taking into account the co. in which we are investing and to calculate, WACC following needs to be followed:
1)Degear WACC by taking the BETA of equity of co. which we are investing by which we get Asset beta.
2)Regearing WACC by using the asset beta calculated in the above line and find Beta of equity,if beta is >1 then the business is riskier.
Using the beta of equity calculated to find cost of equity.

I think this answers ur question.

there is one aricle in student accountant for the f9 paper i thk in april 2008,
its on CApm but it explains this gear ungear
have a look at that!
alisha

I'm going to bump the tread up.


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