Chapter 12, Problem 19P

a.

Summary Introduction

To determine: Company TH’s unlevered cost of capital and unlevered beta.

Introduction:

Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.

Cost of capital refers to the return that the investors expect on a particular investment. In other words, it refers to the compensation demanded by the investors for using their capital.

b.

Summary Introduction

To determine: Company TH’s equity cost of capital using CAPM and the unlevered cost of capital.

Introduction:

CAPM is an equation derived from the security market line that attempts to explain the relationship between the risky asset’s expected return and its beta coefficient.

Cost of capital refers to the return that the investors expect on a particular investment. In other words, it refers to the compensation demanded by the investors for using their capital.

c.

Summary Introduction

To discuss: The difference between Company TH’s equity cost of capital using CAPM and Company TH’s unlevered beta.

d.

Summary Introduction

To determine: The cost of capital of the firm’s project.