Question

# 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 0.86 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.

 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%.

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