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Sir in this Qs examiner has written following assumption in his answer:
It is assumed that Proxy Co’s asset beta represents business risk of the project. The validity of this assumption needs to be assessed. For example, Proxy Co’s entire business may not be similar to the project, and it may undertake other lines of business. In this case, asset beta would need to be adjusted so that only project’s business risk is considered
Sir instead of above, if I write following would it be fine?
It is assumed that Proxy Co’s asset beta represents business risk of the project since both companies are in same industry, therefore they face same business risk
Thanks sir, likewise in fabuki D2010 Qs, examiner has written the following assumption
Haizum Co’s (proxy co) ungeared cost of equity is used because it is assumed that this represents the business risk attributable to the new line of business. The ungeared cost of equity is calculated on the assumption that Modigliani and Miller’s (MM) proposition 2 applies.
Sir if instead of above I write following then would it also be fine?
It is assumed that Proxy Co’s ungeared cost of equity represents business risk of Co’s new line of business since both companies are in same industry, therefore they face same business risk. M&M proposition 2 is used to calculate Proxy co ungeared cost of equity
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