This part of question 2 required candidates to calculate a project-specific cost of equity for a planned joint venture. Many candidates lost marks here because they were not able to use correctly the asset beta formula provided in the formulae sheet.

Candidates needed to ungear the equity beta of the proxy company to an asset beta using the capital structure of the proxy company, regear the asset beta to an equity beta using the capital structure of the investing company, and use this equity beta in the capital asset pricing model (CAPM) to calculate a project-specific cost of equity.

Errors that were made in this calculation included:

* Ignoring taxation, either when ungearing or when regearing 
* Using incorrect weightings of equity and debt when ungearing or regearing 
* Regearing instead of ungearing and vice versa 
* Using the average equity risk premium as the return on the market