Risk-adjusted WACC

In this lesson

1. 0:00 Risk-adjusted WACC method overview
2. 0:13 When to use business risk adjustment
3. 0:24 Ungearing and regearing equity beta
4. 1:08 De-gear, regear, CAPM, cap it process
5. 1:28 Munch Co worked example setup
6. 2:27 Ungearing proxy company equity beta
7. 3:09 Regearing with company capital structure
8. 3:47 Applying revised beta to NPV discount rate

About this lesson

This video walks you through the risk-adjusted WACC method: ungearing an equity beta from a comparable company to isolate business risk, then regearing it using your own company's capital structure to reflect financial risk, and finally using that revised beta in the capital asset pricing model to calculate cost of equity for NPV analysis. This technique is essential for investment appraisal in AFM and strategic finance decisions where project risk differs from corporate risk. The video uses a practical worked example: Munch Co, a supermarket exploring a café venture, needs to find the appropriate discount rate using Coffee Co as a proxy for the café business. You'll see exactly how to ungear Coffee Co's equity beta to remove its financial risk, then regear it using Munch Co's gearing to reflect the correct financial structure. The four-step process—ungear, regear, apply CAPM, then calculate WACC—gives you a repeatable framework for any project appraisal scenario where business risk changes but financial risk stays constant.

Duration: 4m