Capital structure and risk

In this lesson

1. 0:00 Capital structure and project-specific risk
2. 0:36 Understanding beta and CAPM fundamentals
3. 1:23 Three-step approach to adjusting beta
4. 2:38 Worked example: Shan company expansion
5. 4:30 Ungearing beta for proxy company
6. 5:05 Regearing beta for target capital structure
7. 5:36 Calculating risk-adjusted cost of equity

About this lesson

You'll discover why the standard weighted average cost of capital isn't always appropriate for specific projects, and master the technique of ungearing and regearing beta to reflect different financing scenarios. The video walks you through the core methodology: finding a proxy company in the target industry, adjusting its beta to remove the effect of its gearing, then regearing that asset beta to match your company's specific debt-to-equity ratio. You'll work through the asset beta formula and see how to apply it step by step, using the CAPM calculation to arrive at a risk-adjusted cost of equity that accurately reflects both the business risk of the new industry and your company's financing decisions. This technique is essential for Advanced Financial Management and Strategic Business Leader case studies, where investment appraisal questions often require you to calculate a bespoke discount rate. By the end, you'll be confident adjusting beta for gearing changes and calculating the appropriate cost of capital for any new project scenario.

Duration: 6m