There has been much recent volatility within a specific highly technical sector of the electronic components industry. This industry sector comprises specialist businesses delivering essential components, custom solutions and highly technical servicing support. The industrys operating environment has experienced many changes in recent years, driven by technological developments. This has been both challenging and exciting for those doing business within the environment. In addition, mainly due to Covid-19, there are currently severe disruptions within the industry due to significant supply chain issues and these are likely to be a problem for some time.

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%. Please note that your response should be structured in a way that provides useful information to the decision-maker. Hence, it needs to include clear problem introduction, full explanations and critical analysis relevant to the finance decision context, not just the computations alone.

The following should be included within your response:

(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.

iii. Assuming that the proposed investment is undertaken calculate the expected rate of equity return. Discuss any key implications arising from your results in parts (i), (ii) and (iii).