Valuations using a proxy company - part 2

In this lesson

1. 0:00 Equity and asset betas explained
2. 2:00 Ungearing and regearing formula breakdown
3. 3:54 Valuation technique four-step process
4. 5:30 Applying MM formula to cost of equity
5. 6:02 Using cost of capital in NPV valuation

About this lesson

You'll master the process of ungearing and regearing betas to adjust for different capital structures, then apply those adjusted costs of capital to value the target business. This video builds on foundational concepts of equity and asset betas, showing you exactly how systematic risk exposure changes with financial leverage. The core technique involves four steps: extracting the asset beta from a proxy company's published equity beta, calculating an ungeared cost of equity using CAPM, regearing that cost to reflect your own company's debt levels, and finally using the adjusted cost of capital in an NPV calculation. This approach is essential for Strategic Business Leader and Advanced Financial Management papers, where you'll encounter real exam scenarios requiring you to value businesses in unfamiliar industries. By following the structured methodology and working through the calculations step by step, you'll build confidence in handling multi-stage valuation problems. The technique transforms published market data into a practical tool for investment appraisal, ensuring your funding costs accurately reflect both the business sector and your company's financial structure.

Duration: 6m