Page 142 - AFM Integrated Workbook STUDENT S18-J19
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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.
4. Use this ungeared k e to calculate a project NPV (“base case NPV”).
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