Environ Systems is a firm that specializes in cleaning environmental damage (waste disposal) and specialty chemicals. The firm has been traded for only 2 years and gets all of its revenue in the United States. You have been asked to estimate a cost of equity for the firm and have collected the following information:

• The average regression beta across waste disposal firms is 1.34 and the average market debt to equity ratio for these firms is 12.0%.
• The average regression beta for chemical firms is 1.15 and the average market debt to equity ratio is 25.0%.
• The corporate tax rate is 40%.
• Environ Systems book value of equity is $500 million but the market value of equity is $2 billion.
• The book (and market) value of debt is $ 500 million.

1. Estimate the levered beta for Environ Systems, assuming that 80.0% of its value comes from chemicals and 20.0% from environmental clean up.

2. Now, assume that Environ Systems decides to borrow an additional $1.5 billion to expand its environmental clean up business. Estimate then new levered beta for Environ Systems if it were to take this action.