Capital Structure (3) Flashcards
What is equity beta?
A measure of the systematic risk of a share, including business and financial risk
What is asset beta?
Ungeared beta that only measures business risk
What happens where a business is moving into a different business area?
It cannot use its current WACC to assess the project because risk is chagning. Therefore, MCC is needed
Steps for MCC?
Find asset beta of company in same business as new project
Regear asset beta to reflect project’s gearing
Use re-geared beta to calculate an appropriate cost of equity
If a company has a high equity beta?
Maybe ebcause of high gearing, not because it’s a high risk business
Why do we need to adjust the asset beta?
As a project is financed using some debt finance which creates a financial risk along with a business risk
What is the re-geared beta used for?
Calculate a project-specific cost of equity. Showing the financial and business risk
What is regearing the beta?
Adjusting the asset beta by including impact of gearing on a project
What is meant by project specific cost of WACC that represents MCC/
It is cost of raising additional finance required by shareholderts and debt-holders for financing new investments in the company
