Page 21 - PowerPoint Presentation
P. 21

COST OF CAPITAL


            Ordinary equity (ke)






            Capital Asset Pricing Model (CAPM):

            The entities will have different capital structures, therefore, first ungear the proxy Beta using the
            following formula:




            B (ungeared / asset beta)                   =             B (geared) x               E____

                                                                                            E + D(1 – t)

                                                        =             0.7 x          20_____
                                                                               20 + 80(0.72)

                                                        =             0.18




            Then re-gear the proxy Beta taking the unlisted (private) company’s capital structure into account:



            B (geared / equity beta)                    =             B (ungeared) x E + D (1 – t)

                                                                                                E

                                                        =             0.18 x 40 + 60(0.72)
                                                                                     40

                                                        =             0.37
                                                                                                                                     21
   16   17   18   19   20   21   22   23   24   25   26