When valuing a firm you plan to acquire by buying all of its equity, you should

Question

When valuing a firm you plan to acquire by buying all of its equity, you should use:

Unlevered beta to calculate its cost of equity.

Its current market beta to calculate its cost of equity.

Use a cost of equity estimate based on the capital structure you are going to use going forward.

Use dividends-based valuation model using its existing cost of equity.

Unlevered beta to calculate its cost of equity.

Its current market beta to calculate its cost of equity.

Use a cost of equity estimate based on the capital structure you are going to use going forward.

Use dividends-based valuation model using its existing cost of equity.

Explanation / Answer

Its current market beta to calculate its cost of equity.

As this is the reflective of change which the share price has seen and how much as per the market it has responded and how much return as shareholder they can expect from the company if they were invested which we find in the CAPM model. This value is also used to find increasing return's had he invested this money in a risk free security. Recall as per CAPM you use, Rate of return = risk free rate + beta( - risk-free rate + market risk premium) through which you calculate the required rate of return.

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