Page 19 - PowerPoint Presentation

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

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