Skip to content

ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions

When estimating a project-specific cost of equity for an overseas subsidiary using the CAPM, which approach is most appropriate for a UK parent entering a new industry in a foreign country?

Take a comparable listed company's equity beta, ungear it to remove its financial risk, then regear it for the project's financing structure. The parent's own beta or WACC would only be suitable if business and financial risk were unchanged.

  1. AUse the equity beta of a comparable listed company, ungear it, then regear it to the project's financing structureCorrect
  2. BUse the parent's existing equity beta unchanged
  3. CUse the foreign market's risk-free rate as the parent's cost of equity
  4. DUse the parent's weighted average cost of capital regardless of project risk

Explanation

Project business risk differs from the parent's, so a proxy company's asset beta is derived by ungearing and then regeared for the project's gearing. Using the parent's beta or WACC ignores differing business risk.

Did you get it right without looking?

One question tells you little. A timed set on International investment and financing decisions shows your real accuracy, how long you take and where you lose marks.

Practise International investment and financing decisionsFree diagnostic mock

More International investment and financing decisions questions