Question

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 0.86 the​ risk-free rate is 3.8 %and the market risk premium is5.4 % If your​ firm's project is​ all-equity financed, estimate its cost of capital.

Answer 1

Under the Capital Asset pricing model
Rs = Rf + Beta*(Rm-Rf)
Rf is the risk free rate that is .038.
Beta = .86
(Rm - Rf) is the market risk premium that is .054.
Rs is the expected return on the stock.
Rs = .038 + (.86*.054)
Rs = .038 + (.04644)
Rs = .08444
The expected return on the stock is 8.44%.
The expected return on the stock is the cost of equity.
The cost of equity is 8.44%.
Since the firm's project is all-equity financed, the cost of capital
is equal to the cost of equity.
The cost of capital is 8.44%.