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 4.1%, and the market risk premium is 5.4%. If your firm's project is all-equity financed, estimate its cost of capital. Harburtin's cost of capital is % (Round to two decimal places.) During the recession in mid-2009. homebuilder KB Home had outstanding 5-year bonds with a yield to maturity of 8.5% and a rating. If corresponding risk free rates were 3.3%, and the market risk premium was 5.1%, estimate the expected retum of KB Home's debt using two different methods. How do your results compare? (More the average loss rate for unsecured debt is about 60%. Ste annual atau rates by debt rating here and average debt betas by rating and maturity here) Considering the probability of dertault, the expected retum of the bond is I (Pound to two decimal places.) Considering CAPM and given the beta for a 7-year bend, e expected retum of the bond is % (Round to two decimal places.) How do your results compare? (Select from the drop-down menu) While bon estimates are rough approximation, they both confirm that the expected retum of KB Home's debt is well is promised yield Data Table Data Table TABLE 12.2 TABLE 12.3 Average Debt Betas by Rating and Maturity Annual Default Rates by Debt Rating (1983-2011) Rating AAA AA A CCC Default Rate: Average 0.196 0.2% 0.5% 2.23 5.59 12.2% 14.1 In Recessions 0.0% 1.0% 3.0% 3.0% 8.0% 16.096 48.09% 79.0N Source: "Corporate Defaults and Recovery Rates, 1920-2011," Moodyl Global Chadir Policy, February 2012 By Rating and a bow B CCC Ave Beta 15 Your Aug Bera 0.01 0.06 0.07 0.14 Source: S. Schaefer and Strbulary, "Risk in Capital Structure Arbitrage. Sunford GSB working pet, 2009 0.0% Print Done Prine