Question
Only solve 12-19, 12-18 has the information to solve 12-19. 12-18. Your firm is planning to invest in an automated packaging plant. Harburtin Industries is
Only solve 12-19, 12-18 has the information to solve 12-19.
12-18. Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an allequity firm that specializes in this business. Suppose Harburtins equity beta is 0.85, the risk-free rate is 4%, and the market risk premium is 5%. If your firms project is all equity financed, estimate its cost of capital.
12-19. (a, b, c only) Consider the setting of Problem 18. 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 $20 per share, with 15 million shares outstanding. It also has $100 million in outstanding debt, with a yield on the debt of 4.5%. Thurbinars equity beta is 1.00. a. Assume Thurbinars debt has a beta of zero. Estimate Thurbinars unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinars unlevered cost of capital. b. Estimate Thurbinars equity cost of capital using the CAPM. Then assume its debt cost of capital equals its yield, and using these results, estimate Thurbinars unlevered cost of capital. c. Explain the difference between your estimate in part (a) and part (b).
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