Part 1Your 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 0.880.88, the risk-free rate is 3 %3%, and the market risk premium is 5 %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, which is also engaged in a similar line of business. Thurbinar has a stock price of $2323 per share, with 1414 million shares outstanding. It also has $102102 million in outstanding debt, with a yield on the debt of 4.1 %4.1%. Thurbinar's equity beta is 11.b. Assume Thurbinar's debt has a beta of 00. 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? Part 1a. If your firm's project is all-equity financed, estimate its cost of capital. Harburtin's cost of capital is [input]7.407.40 %. (Round to two decimal places.)Part 2b. Assume Thurbinar's debt has a beta of 00. 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 [input]enter your response here . (Round to two decimal places.)

Question

Part 1Your 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 0.880.88​, the​ risk-free rate is 3 %3%​, and the market risk premium is 5 %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​, which is also engaged in a similar line of business. Thurbinar has a stock price of ​$2323 per​ share, with 1414 million shares outstanding. It also has ​$102102 million in outstanding​ debt, with a yield on the debt of 4.1 %4.1%. Thurbinar​'s equity beta is 11.b. Assume Thurbinar​'s debt has a beta of 00. 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? Part 1a. If your​ firm's project is​ all-equity financed, estimate its cost of capital. Harburtin​'s cost of capital is [input]7.407.40 ​%. ​ (Round to two decimal​ places.)Part 2b. Assume Thurbinar​'s debt has a beta of 00. 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 [input]enter your response here . ​ (Round to two decimal​ places.)

BlackTom AI · Accepted Answer

Unlevering beta uses the relationship between levered (equity) beta and unlevered (asset) beta. With debt beta = 0 and no taxes implied in this part, the relevant formula is:
beta_unlevered = beta_equity / (1 + D/E).

Step 1 — compute market value of equity (E):
Price per share = $23
Shares outstanding = 14 million
E = 23 × 14 = $322 million

Step 2 — record market value of debt (D):
D = $102 million (given)

Step 3 — compute the debt-to-equity ratio (D/E):
D/E = 102 / 322 = 0.316146 (approx)

Step 4 — apply the unlevering formula using Thurbinar’s equity beta = 1.00:
1 + D/E = 1 + 0.316146 = 1.316146
beta_unlevered = 1.00 / 1.316146 = 0.759999 ≈ 0.76 (rounded to two decimals)

Using CAPM to get the unlevered cost of capital (additional step requested in the part): r_unlevered = r_f + beta_unlevered × market risk premium = 3% + 0.76 × 5% = 3% + 3.8% = 6.8%.

Why this is correct: the question explicitly sets debt beta = 0 and provides market values for equity and debt; under those assumptions the simple divisor (1 + D/E) correctly removes financial leverage from the observed equity beta. Rounding 0.759999 to two decimal places yields 0.76.

Why other answers would be incorrect: using a different equity beta (e.g., 1.1 or 0.88) changes the numerator and yields different betas; including corporate taxes would require the factor (1 + (1 − Tc)·D/E) and produce a different unlevered beta; miscomputing E or D/E (wrong share count or price) would also change the result.

Conclusion: Thurbinar’s unlevered beta = 0.76, which matches the provided answer.

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Part 1Suppose PepsiCo's stock has a beta of 1.071.07. If the risk-free rate is 3 %3% and the expected return of the market portfolio is 8 %8%, what is PepsiCo's equity cost of capital? Part 1PepsiCo's equity cost of capital is [input]enter your response here %. (Round to two decimal places.)

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