Tesla is an all-equity firm that specializes in wind farms. Suppose Tesla's equity beta is 1.00, the risk-free rate is 3%, and the market risk premium is 5%.

1. Assume you are evaluating a project for a firm in a similar line of busines. If your firm's project is all-equity financed, estimate its cost of capital.

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(3 marks)

You decide to look for other comparable firms to reduce estimation error in your cost of capital estimate. You find a second firm, Rivian, which is also engaged in a similar line of business. Rivian has a stock price of $15 per share, with 20 million shares outstanding. It also has $110 million in outstanding debt, with a yield on the debt of 5.0%. Rivians equity beta is 1.25.

2. Assume Rivian's debt has a beta of zero. Estimate Rivian's unlevered beta. Use the unlevered beta and the CAPM to estimate Rivian's unlevered cost of capital.

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(4 marks)

3. Estimate Rivian's equity cost of capital using the CAPM. Then assume its debt cost of capital equals its yield and using these results, estimate Rivian's unlevered cost of capital.

(4 marks)

4. Explain the difference between your estimate in part (b) and part (c).

(3 marks)