Rose plc is a key competitor within the electronic components industry. It is a subsidiary of a large conglomerate. The beta factor of Rose plc equity is stated as 1.6. The company has issued share capital of 100 million ordinary shares with a current market value of 3.20 and 141 million 8% irredeemable loan stock with a market value of 85.11 each. The directors are considering using some of the companys excess cash fund to undertake an investment of 20 million. The excess cash fund of 24 million is currently in a risk free account generating 7% gross return.

Apart from this cash fund, the remaining value of Rose plc is invested in a diversified portfolio of securities. The investment project is forecast to produce annual cash flows of 3 million gross per annum to perpetuity. The appropriate capitalisation rate for the project cash flows has been estimated as 12% before tax. Assume a market rate of return of 15% and a corporation taxation rate of 25%.

(a) i. Derive the beta factor of the equity of Rose plc assuming Rose plc is all equity financed. Provide a full explanation of your finding in relation to the company context.

ii. Calculate the asset beta factor of the current portfolio of securities managed by Rose plc. Provide further support to the decision-making by clearly explaining your result.