Because it is a private company, it does not have a betaįactor. Suitable cost of capital to use as the discount rate. So what is the relevance of geared and ungeared betas?Ī private company may want to evaluate a proposed new investment using DCF and so wants to identify a The beta of Geared, as we should expect, is higher than the beta of Ungeared.Ģ.7.4 Using the geared and ungeared beta formula to estimate a beta factor The beta value of Ungeared is 1.0, which means that the expected returns from Ungeared areĮxactly the same as the market returns, and Rm = 700/6,600 = 10.6%. Since its market value (MV) is in equilibrium, the cost of equity in Geared can be calculated as: The debt capital of Geared can be regarded as risk free. The total value of Geared is higher than the total value of Ungeared, which is consistent with MM.Īll profits after tax are paid out as dividends, and so there is no dividend growth. Two companies are identical in every respect except for their capital structure.
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