Asset beta (Ba): An ungeared beta measures only business risk

Equity beta (Be): A measure of the systematic risk of a share, including business risk and financial risk

Ba=((Ve/(Ve+Vd(1-T)*Be+((Vd(1-T))/(Ve+Vd(1-T)*Bd

Where a company is moving into a different business area, it cannot use its current WACC to assess the project because its risk is changing. A marginal cost of capital is therefore needed.

This can be calculated by following 3 steps:

1. Find the asset beta of a company in the same business as the new project.

   First, find the beta of a company in the same business (a proxy company) as the proposed project; this is an equity beta.This equity beta gives and indication of the business risk of the project but will be distorted by the geasring of the proxy company

2. Re-gear the asset beta to relfect the project's gearing

3. Use the regeared beta to calculate an appropriate cost of equity