4. Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose the tax rate is 40%, Harburtin’s unlevered beta is 1.95, the risk-free rate is 2%, and the market return is 6.7%. Use Fernandez formulas that assume beta for debt is not zero for levered and unlevered cost of capital. Compute final answers using at least 3 decimal places.

a. If your firm’s project is all equity financed, estimate its cost of capital.

b. 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 $20 per share, with 25 million shares outstanding. It also has $100 million market value in outstanding debt, with a yield on the debt of 4.5%. Thurbinar’s equity beta is 1.50. Estimate Thurbinar’s unlevered beta.

c. What unlevered beta would you use to estimate the cost of capital for Harburtin’s project?

d. You wish to finance this project with 40% debt to equity ratio and Harburtin can borrow at the same rate as Thurbinar. Compute the project’s cost of equity.

e. What is your estimate for the cost of capital of your firm’s project?