please complete all parts to the problem
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 0.88, the risk-free rate is 3%, and the market risk premium is 6% a. Wyour m'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 ine or business. Thurbinar has a stock price of $25 per share, with 15 milion shares outstanding. It also has $110 million in outstanding debt, with a yield on the debt of 4.8%. Thurbinar's equity bota is 1.00 b. Assume Thurbinar's debt has a bela of zero. Estimate Thurbinars unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar's unlevered cost of capital e. Estimate Thurbirar'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) a. You decide to average your results in part (b) and part (e), and then evenage this resut with your estimate from part (a) What is your estimate for the cost of capital of your firm's project? a. If your firm's project is al-equity financed, estimate is cost of capital The project's cost of capitalis > (Round to two decimal places.) b. Assume Thurbisar's debt has a belsof zero. Estimate Thurbinars unlovered beta. Use the unlevered bets and the CAPM to estimate Thurbinar's revered cost of capital Thurbinars unlevered beta is Round to two decimal places.) Thurbinars unlevered cost of capital is %. Round to two decimal places.) c. Estimate Thurbinars equity cost of capral using the CAPM. Then assume is debt cost of capital equals its old and using these results, estimate Thurbinars unlevered cost of capeal, Thurbinar's equity cost of capital is %. (Round to two decimal places.) Thurbinar's unlevernd cost of captalls % (Round to two decimal places) d. Explain the cifference between your estimate in part(b) and part (c) (Select the best choice below) O A The answers are actually the same any difference is just us to rounding errors. OB. In the first case, we assumed the debthad a bets of 20 so we assumed the cost of debt was the riskless rate, while in the second case we assumed the cost of debt was the yield on debl. Cick to select your answers Your firm is planning to invest in an automated packaging plant. Harturin Industries is an all-equity firm that specializes in this business Suppose Harturtin's equity beta is 0.88 the risk-free rate is 3%. and risk premium is 6% a. If your finis project is all-equity financed, estimate its cost of capital. After compusing 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 enge Similar line of business. Thurbinar has a stock price of $25 per share with 15 milion shares outstanding. It also has $110 million in outstanding debt, with a yield on the debt of 48%. Thurbinar's equity beta 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 belween 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? 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 Thurbinars unlevered cost of capital Thurbinar's equity cost of capital is % (Round to two decimal places.) Thurbinat's unlevered cost of capital is % (Round to two decimal places) d. Explain the difference between your estimate in part (b) and part(e) (Select the best choice below) OA. The answers are actually the same, any difference is just due to rounding errors OB. In the first case, we assumed the debt had a bota of zero so we assumed the cost of debt was the riskless rate, while in the second case we assumed the cost of debt was the yield on dobt OC. The answers difer because we are using approximations rather than formulas that hold exactly OD. We should have gotten the same answer the problem is the numbers in the problem are not consistent 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? The average unlevered cost of capital from part (b) and part (e) is 0% (Round to two decimal places.) The average utlevernd cost of capital from part (b) and part (e) with part (a) is % (Round to two decimal places.) Click to select your answers
