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 0.77, the risk-free rate is 3%, and the market risk premium is 4%. a. If your firm'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 line of business. Thurbinar has a stock price of $19 per share, with 16 million shares outstanding. It also has $114 million in outstanding debt, with a yield on the debt of 4.8%. Thurbinar's equity beta is 1. b. Assume Thurbinar's debt has a beta of 0. 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 between 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? a. If your firm's project is all-equity financed, estimate its cost of capital. Harburtin's cost of capital is 6.08 %. (Round to two decimal places.) b. Assume Thurbinar's debt has a beta of 0. Estimate Thurbinar's unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar's unlevered cost of capital. Thurbinar's unlevered beta is ☐. (Round to two decimal places.)
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 0.77, the risk-free rate is 3%, and the market risk premium is 4%. a. If your firm'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 line of business. Thurbinar has a stock price of $19 per share, with 16 million shares outstanding. It also has $114 million in outstanding debt, with a yield on the debt of 4.8%. Thurbinar's equity beta is 1. b. Assume Thurbinar's debt has a beta of 0. 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 between 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? a. If your firm's project is all-equity financed, estimate its cost of capital. Harburtin's cost of capital is 6.08 %. (Round to two decimal places.) b. Assume Thurbinar's debt has a beta of 0. Estimate Thurbinar's unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar's unlevered cost of capital. Thurbinar's unlevered beta is ☐. (Round to two decimal places.)
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 28P
Related questions
Question
Transcribed Image Text: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 0.77, the risk-free rate is
3%, and the market risk premium is 4%.
a. If your firm'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 line of business. Thurbinar has a stock price of $19 per share, with 16 million shares outstanding. It also has $114 million in outstanding debt, with a yield on the debt of
4.8%. Thurbinar's equity beta is 1.
b. Assume Thurbinar's debt has a beta of 0. 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 between 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?
a. If your firm's project is all-equity financed, estimate its cost of capital.
Harburtin's cost of capital is 6.08 %. (Round to two decimal places.)
b. Assume Thurbinar's debt has a beta of 0. Estimate Thurbinar's unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar's unlevered cost of capital.
Thurbinar's unlevered beta is ☐. (Round to two decimal places.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT