I'm a RE Finance major who is applying to an honors finance program at my school. The program is primarily for placing kids into IB, which I'm not particularly interested in as a career path, but I want to learn the technical finance skills that IB guys have.
We're doingfor the program right now and one of I was asked a question. When asked how to determine what discount rate to use I said that I would back out an asset beta from the company's equity beta (unless the investment was a scale-expansion) and plug it into the .
The interviewer said that this was wrong and that I should usebecause it takes debt into account. My understanding is that using levered betas in the CAPM formula also takes debt into account because the asset beta formula is Beta_asset=Beta_equity(E/D(1-Tax)+E)). So isn't the capital structure taken into account?
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