The total market value of the equity share of O.R.E. Company is 60,00,000 and the total value of the debt is 40,00,000. The treasurer estimate that…

(i) βasset = βequity × (VE / (VE + VD)) + βdebt × (VD / (VE + VD)) Note: Since βdebt is not given it is assumed that company debt capital is virtually riskless. If company's debt capital is riskless than above relationship become: βasset = βequity × (VE / VO) Here βequity = 1.5; As βdebt = 0 VE = 60 lakhs. VD = 40 lakhs. VO = 100 lakhs. βasset = 1.5 × (60 lakhs / 100 lakhs) = 0.9 (ii) If only equity is used to finance the expansion, the Cost of Capital for discounting company's expansion of existing business shall be computed as follows: Company's cost of equity = Rf + βA × Market Risk premium Where Rf = Risk free rate of return βA = Beta of company assets Therefore, company's cost of equity = 8% + 0.9 × 10% = 17% and overall cost of capital i.e. discounting rate for an expansion of company's present business shall also be 17%.