Question 3b
Examiners Report
This question required candidates to calculate a project-specific cost of equity. First, the beta of a proxy company had to be ungeared to give an asset beta. Second, the asset beta had to be regeared to give a project-specific equity beta. Finally, the project-specific cost of equity could be calculated using the CAPM.
Many candidates gained very good marks here. One error that some candidates made was to omit the tax effect from the calculation, which was surprising, as the equation required was given in the formulae sheet.