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Chapter 7

4.3 Step 1: Base case NPV

 Ignore gearing! – discount project cash flows using a suitable,
ungeared k e.

 Step by step approach:

1 Find the equity beta from a suitable quoted company (i.e. in the same
industry as the project).

2 Adjust this equity beta to convert it to an asset beta – degear it.

3 Insert this degeared beta (DO NOT REGEAR!) into CAPM to find a
project k e.

Use this ungeared ke to calculate a project NPV (‘base case NPV’).

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