Can you please explain the logic behind the formulae?

(As of now I am memorizing the two formulae without clearly understanding the purpose behind the operations)

Please help

Thank you

Can you please explain the logic behind the formulae?

(As of now I am memorizing the two formulae without clearly understanding the purpose behind the operations)

Please help

Thank you

If you remove the factors of (1 – *t*), you’ll see that the formulae simply multiply or divide by (A/L). The (1 – *t*) factor is something that CFA Institute added a couple of years ago, presumably to account for the fact that interest is tax-decuctable whereas dividends are not. I’m not altogether certain how that translates to discounting the value of debt; I think that CFA Institute added it to make candidates’ lives just that little bit more difficult.

Thanks a lot S2000magician.

Your clarification was very useful. I actually wrote the formulae, ignoring the (1-t) and found it easier to understand.

Thanks again…

My pleasure.

Equity beta is the comparable firms levered beta (Reflecting their own capital structure)

you unlever that beta to get Asset beta (no capital structure is reflected)

you then re-lever that beta to get Project beta (reflecting your own capital structure)