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please illustrate: Project’s Beta vs Firm’s beta (any difference?) project’s WACC vs. firm’s WACC ( is...

please illustrate:

  • Project’s Beta vs Firm’s beta (any difference?)
  • project’s WACC vs. firm’s WACC ( is there any difference between those, what's difference ?)
  • what happens to your valuation of the project if you use firm’s WACC as your discount rate?
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Answer #1

Project Beta is different from a firm Beta as an individual project may have its inherent risk different from the firm as a whole. If one considers a firm in the oil drilling space undertaking a project in the oil refining space, the project Beta would differ from the firms Beta. The project beta may be higher or lower than the average of the firms Beta depending on the risk characteristics of the project.

This difference in the Beta would show up in the difference in the cost of equity for the project and the firm as a whole. The change in the cost of equity would in turn change the WACC. Thus Project WACC is different from the firm WACC.

If firm's WACC is used as the project WACC, it could result in overvaluation is project is of higher risk and undervaluation if the project is of lower risk.

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