Question
In: Finance
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity...
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 0.81, the risk-free rate is 5%, and the market risk premium is 6%.
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 $25 per share, with 14 million shares outstanding. It also has $101 million in outstanding debt, with a yield on the debt of 4.9%. Thurbinar's equity beta is 1.00.
b. Assume Thurbinar's debt has a beta of zero. 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?
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 1 year agoRelated Solutions
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity...
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 0.85, the risk-free rate is 4%, and the
market risk premium is 5%. 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...
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity...
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 0.85,the
risk-free rate is4%,and the market risk premium is 5%.
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,...
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity...
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 0.85, the
risk-free rate is 4%, and the market risk premium is 5%.
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...
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity...
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 0.85, the risk-free
rate is 4%, and the market risk premium is 5%. 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...
UltraMX Corp., an all equity exchange traded company, is planning to invest in a project as...
UltraMX Corp., an all equity exchange traded company,
is planning to invest in a project as follows:
Initial investment = $100 million.
The project is financed with debt and equity in same proportion
(i.e., one part of debt to one part of equity).
Expected cash flows after tax = $10 million in perpetuity.
Tax rate = 25%
Cost of debt after tax of project (4%)
Equity beta of project = 1.5
UltraMX beta = 0.8
Market risk premium (MRP) =6%....
in the Spring you plant your crops and you invest all your time and effort in...
in the Spring you plant your crops and you invest all your time
and effort in the crops until harvest in the late Fall. The profit
you derive from selling your crops is how you live until the next
harvest. If you plant all corn in your fields and so does everyone
else, when harvest comes the market is flooded with corn and has
nothing else to sell to customers, so the price of corn drops like
a rock and...
3. The SSR Co., currently all-equity firm, is planning to build a factory. The beta, systematic...
3. The SSR Co., currently all-equity firm, is planning to build
a factory. The beta, systematic risk, of this project alone is 15%
less than they currently manage. The beta of the assets currently
managed is 1.5. The corporate tax rate the firm faces is 34%. The
company has a target debt-to-equity ratio of 3/7. The initial
investment cost is $30 million and the expected operating after-tax
cash flows are $10 million per year for five years. The risk-free
rate...
MBM Industries is an all-equity firm with 50 million shares outstanding. MBM has £200 million in...
MBM Industries is an all-equity firm with 50 million shares
outstanding. MBM has £200 million in cash and expects future free
cash flows of £75 million per year. Management plans to use the
cash to expand the firm's operations, which in turn will increase
future free cash flows by 12%. MBM's cost of capital is 10%; assume
that capital markets are perfect.
i. What is the value of MBM if it uses the £200 million to
expand?
ii. What is...
MM Inc. is an all-equity firm (the firm value equals the value of equity). As the...
MM Inc. is an all-equity firm (the firm value equals the value
of equity). As the CEO of MM Inc., you are considering purchasing a
private jet for the firm. The private jet costs $12 million today
and will save $2 million (in today’s value) on travel expenses for
the firm over its life. You own 1% of MM's equity ownership. The
private benefits of the private jet to you are estimated to be
$800,000 in today’s value.
Suppose you...
MM Inc. is an all-equity firm (the firm value equals the value of equity). As the...
MM Inc. is an all-equity firm (the firm value equals the value
of equity). As the CEO of MM Inc., you are considering purchasing a
private jet for the firm. The private jet costs $12 million today
and will save $2 million (in today’s value) on travel expenses for
the firm over its life. You own 1% of MM's equity ownership. The
private benefits of the private jet to you are estimated to be
$800,000 in today’s value.
Suppose you...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- MARGI sells different types of wine. Customers place orders to the most popular “Summer Wine” at...
- Java. If possible please put explanations for each line of code. Write a test program that...
- . Use the following information to calculate your company's expected return State Probability Return Boom 20%...
- You are considering the following two projects and can only take one. Your cost of capital...
- C++: Write a program that produces truth tables for the following compound propositions. Write the header...
- 1. What is the historical role of investment bankers ? Has this role changed ? Why...
- How were the original Internet requirements met through its design? What are the two main requirements...
ADVERTISEMENT