8 Company versus project cost of capital (LO 71 Dorset Ltd is allequity financed and has a cost of capital of 16 per cent per annum. Observers suggest that Dorset could easily borrow up to 40 per cent of the value of its assets at an interest rate of 10 per cent per annum and achieve a rating for its debt of A+ or better. They argue that raising new capital by borrowing would lower the company's cost of capital, and increase the net present value of some projects that were recently rejected. Use a numerical example to illustrate the observer's argument. Is their argument correct? Give reasons for your