Alpha Co., a listed company, is evaluating a project in the packaging industry that will cost $9.725 million. Alphas financial statement in the table below is compared with Gamma and Omega, also listed companies in the packaging industry:

	Alpha	Gamma	Omega
Net assets	121 million	52 million	93 million
Financed by
Common shares[1]	15 million	10 million	30 million
Retained profit	50 million	27 million	50 million
Debt[2]	56 million	15 million	13 million
Common share market price (cents)	380	180	230
Loan / bond market price ($)	104	112	-
Equity beta	1.2	1.3	1.2

Alpha proposes to fund the project with additional shares issue at a 10% discount to current market price. Issue costs are ignored.

The managers are proposing to use a discount rate of 15%

The risk-free rate is estimated to be 6% and the market return 14%. Corporate tax rate is 33%.

Required:

a. The level of risk for Alpha in comparison with the average industrial risk (5 points)

b. Determine whether 15% is an appropriate discount rate (7 points).

c. Explain your answer (3 points)

[1] Alpha& Omega 15 cents par value, Gamma 25 cents par value

[2] Alpha 12% loan notes, Gamma 14% bonds, Omega bank loans. All traded debt securities have $100 par value.