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Your firm is planning to invest in an automated packaging plant
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 0.93, the risk-free rate is 3%, and the market risk premium is 5.9%. If your firm's project is all-equity financed, its cost of capital is ______%
8.Your firm is planning to invest in a new electrostatic power generation system. Electrostat Inc is a firm that specializes in this business. Electrostat has a stock price of? $25 per share with 16 million shares outstanding. ? Electrostat's equity beta is 1.3. It also has? 256 million in debt outstanding with a debt beta of 0.07. Your estimate of the asset beta for electrostatic power generators is ______.
Expert Solution
Computation of Cost of Capital:
Cost of Capital = Risk-free Rate+Beta*Market Risk Premium
= 3% + 0.93*5.9%
= 3% + 5.487%
Cost of Capital = 8.487% or 8.49%
Computation of Asset Beta:
Asset Beta = Equity Beta * [ (Price per share * Number of shares) / (Price per share * Number of shares + Amount of debt) ] + Debt beta * [ (Amount of debt) / (Price per share * Number of shares + Amount of debt) ]
= 1.3 * [ ($ 25 * 16 million) / ($ 25 * 16 million + $ 256 million) ] + 0.07 * [ ($ 256 million) / ($25 * 16 million + $256 million) ]
= 1.3 * $ 400 million / $ 656 million + 0.07 * $ 256 million / $ 656 million
= 0.792683 + 0.027317
Asset Beta = 0.82 Approximately
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