Your home is planning to invest in an automated packaging plant. Hurbutin industries is an equity from that specializes in the businom. Suppose aborto's equity boto is 0.00, the rich. 600 is 4%, the a. If your firm's project is al 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 line of business. Thurbiner has a stock price of $23 per share with 15 milion shares outstanding It also has $112 million in outstanding debt, with a yield on the debt of 4,3% Thurbinar's equity bata is 100 b. Assume Thurbinar's debt has a beta of zero. Estimate Thurbinars unlevered bots. Use the unlevered beta and the CAPM to estimate Thurber'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 between your estimate in part (b) and part(c) e. You decide to average your results in part (b) and part (e), 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? a. If your firm's project is all-equity financed, estimato its cost of capital The project's cost of capital is % (Round to two decimal places) b. Assume Thurbinars debt has a bota of zero. Estimate Thurbinaru unlevered beta. Use the unlovered bota and the CAPM to estimate Thurbinare unteverod cost of capital Thurtinar's unlevered beta (Round to two decimal places) Thurbinars unlevered cost of capital is % (Round to two decimal places) c. Estimate Thurbinare equity cost of capital using the CAPM. Then assume its debt cost of capital equals its old and using these rotuts, estimate Thurbinars unlevered out of capital Thurbinars equity cost of capital in 1% (Round to two decimal places.) Thurtinar's univered 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) Thurbinar'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) O A In the first case, we assumed the debt had a beta of ero so we assumed the cost of debt was the riskless rate, while in the second case we assumed the cost of debt was the yeld on debt OB The answers differ because we are using approximations rather than formules that hold exactly OC. We should have gotten the same nuwer, the problem is the numbers in the problem are not consistent OD. The answers are actually the same, any difference is just due to rounding errors. You decide to average your results in part (b) and part (e), and then werage this result with your estimate from part (a). What is your estimate for the cost of capital of your first project? The average unlevered cost of capital from part (b) and part(e) is (Round to two decimal places The average unlevered cost of capital from part (b) and part (c) with part (n) is % (Round to two decimal places)
