Reference no: EM132597816
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an? all-equity firm that specializes in this business. Suppose? Harburtin's equity beta is 0.81?, the? risk-free rate is 5%?, and the market risk premium is 5%.
a. If your? firm's project is? all-equity financed, estimate its cost of capital.
After computing the? project's cost of capital you decided to look for other comparables to reduce estimation error in your cost of capital estimate. You find a second? firm, Thurbinar? Design, which is also engaged in a similar line of business. Thurbinar has a stock price of $15 per? share, with 15 million shares outstanding. It also has $110 million in outstanding? debt, with a yield on the debt of 4.8%. ?Thurbinar's equity beta is 1.00.
b. Assume? Thurbinar's debt has a beta of zero. Estimate? Thurbinar's unlevered beta. Use the unlevered beta and the CAPM to estimate? Thurbinar's unlevered cost of capital.
c. Estimate? Thurbinar's equity cost of capital using the CAPM. Then assume its debt cost of capital equals its yield and using these? results, estimate? Thurbinar's unlevered cost of capital.
d. Explain the difference between your estimate in part ?(b?) and part ?(c?).
e. You decide to average your results in part ?(b?) and part ?(c?), and then average this result with your estimate from part ?(a?). What is your estimate for the cost of capital of your? firm's project?
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