FIN.5:10 - Architectural Rationale

The required return expresses the opportunity cost of committing capital to the valued risk. Equity holders receive what remains after senior claims, so the same business can have different equity risk under different financing. Separating business exposure from financing explains both the peer adjustment and why a low debt return cannot price the whole operation.

The debt policy also determines future deductions. A fixed borrowing amount and an amount reset with business value expose those tax savings to different risks. That is why policy selection precedes beta transfer. WACC is a convenient operating discount rate when its model fits; APV keeps dated financing effects explicit when the fixed-rate representation does not. The choice depends on the financial arrangement and tax basis, not on which calculation gives the preferred NPV.