From Qbank:

Degen Company is considering a project in the commercial printing business. Its debt currently has a yield of 12%. Degen has a leverage ratio of 2.3 and a marginal tax rate of 30%. Hodgkins Inc., a publicly traded firm that operates only in the commercial printing business, has a marginal tax rate of 25%, a debt-to-equity ratio of 2.0, and an equity beta of 1.3. The risk-free rate is 3% and the expected return on the market portfolio is 9%. The appropriate WACC to use in evaluating Degen’s project is *closest to*:

**A)** 8.6%. **B)** 8.9%. **C)** 9.2%.

**Your answer: A was correct!**

Hodgkins’ asset beta:

We are given Degen’s leverage ratio (assets-to-equity) as equal to 2.3. If we assign the value of 1 to equity (A/E = 2.3/1), then debt (and the debt-to-equity ratio) must be 2.3 − 1 = 1.3.

Equity beta for the project:

β_{PROJECT} = 0.52[1 + (1 − 0.3)(1.3)] = 0.9932

Project cost of equity = 3% + 0.9932(9% − 3%) = 8.96%

Degen’s capital structure weight for debt is 1.3/2.3 = 56.5%, and its weight for equity is 1/2.3 = 43.5%.

The appropriate WACC for the project is therefore: 0.565(12%)(1 − 0.3) + 0.435(8.96%) = 8.64%.

So I got the right answer, but only from having done the question before. I don’t really grasp the whole unlever/lever process. Is it something to do with adjusting Hodgkins equity beta to their overall beta (since are a purely commercial printing business with no other interests), then adjusting this to Degens asset beta, which we can then use to find Degens cost of equity? I guess the question is really whats the difference between asset beta and project beta (equity beta?)…