Project Equity Beta

Project Equity Beta

Project equity beta may be calculated for a different industry. In first place asset beta for that industry is calculated, and then used that asset beta to calculate cost of equity for the project.

Project Beta Calculation Example

ABC Company has beta Factor = 1.75, ABC company is interested in new industry, which is different has following information,

Debt to equity = 50%

Equity Beta= 1.6

Risk Free Rate= 5%

Market Rate = 8%

Rate of Tax= 30%

Solution

1.       Asset Beta

βa = [Ve/Ve + Vd (1-t)] x βe

= [50/50 + 50 (1-30%)] x 1.6

= [50/50+35] x1.6

=[50/85]x1.6

=.588x1.6

=.94

2.    Cost of Equity for Project

Cost of Equity = Rf+ βa (Rm – Rf)

= 5% + .94 (8%-5%)

= 5% + .94 (3%)

=7.82%

3.       Cost of Equity for Company

Cost of Equity = Rf+ βa (Rm – Rf)

= 5%+ 1.75( 3%)

=10.5%

Cost of equity for project is lower than cost of equity than company, it means risk associated with project is lower than company own risk.