You are employed in the car industry. You are trying to calculate the cost of capital for a new project in the airline manufacturing sector. Assume there are no taxes and no costs of financial distress.

You have the following information:

1. (i) CarFirst operates exclusively in the car sector. It has a constant debt-to-equity ratio of 1, and a debt beta of 0.2. CarFirsts expected return on equity is 20%.

2. (ii) CarAirCombined has two divisions of equal size: one division is in the airline manufacturing sector and the other division is in the car sector. It has risk-free debt, and a constant debt-to-equity ratio of 0.5. The expected return on equity is 20%.

The risk-free rate is 5% and the market risk premium is 7%.

(a) What is the asset beta of CarFirst? (b) What is the asset beta of CarAirCombined? (c) What is the cost of capital for the new project?