1a. Your Company is planning to invest in a new plant. The ABC Company is all equity firm and its beta is 0.65 the risk-free rate is 5% and the market risk premium is 6%, specializes in the same business. If your companys project is all equity financed estimate its cost of capital.

1b. Consider the setting in question 1a above, you decided to look for other comparable. You find another firm ABC which is in same industry. The stock price of ABC is $15 per share, with 12 million shares outstanding. It also has an outstanding debt of $80million with a yield on debt of 4.5%. The equity beta for the company is 1.

a. Assume ABCs debt has a zero beta. Estimate ABCs unlevered beta.

b. Using the unlevered beta and the CAPM estimate the cost of capital for ABC firm.

c. Estimate ABCs equity cost of capital using the CAPM. Then assume its debt cost of capital

equals to its yield, using these results, estimate ABCs unlevered cost of capital.

d. Take average of your estimates in part (b) and (c) and then again average this result with your estimation in Question 1a. What is your estimate for the cost of capital of your firms project?