5. Intel is exploring a joint venture with Ford to develop computer chips to use in automobile. Althought Intel has traditionally used a cost of equity based on its beta of 1.50 and a cost of capital based on its debt ratio of 5%, it is examining whether it should use a different approach for this project. It has collected the following information. • The average beta for automobile component firms is 0.90, and the average debt/equity ratio across these firms is 40%. . The joint venture will be financed 70% with equity from Ford and Intel, and 30% with new debt raised at a market interest rate of 7.5% a. Estimate the beta that Intel should use for this project. b. Estimate the cost of capital that Intel should use for this project. c. What wuold be the consequences of Intel using its current cost of equity and capital on this project?
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- Gnomes R Us is considering a new project. The company has a debt-equity ratio of .72. The company’s cost of equity is 14.7 percent, and the aftertax cost of debt is 8 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +2 percent. a. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What discount rate should the firm use for the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Gnomes R Us is considering a new project. The company has a debt-equity ratio of .86. The company's cost of equity is 14.6 percent, and the aftertax cost of debt is 7.9 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent. a. What is the company's WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What discount rate should the firm use for the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. WACC b. Project discount rate %You are an analyst at Apex Innovations, known for its cutting-edge technology in the renewable energy sector. Apex is considering moving into high-energy batteries. You have been assigned to determine the leverage beta for this new division. Apex, plans to maintain a target debt-to-equity ratio of 1.88. We comparing other companies in the high-energy battery sector, you learned the average beta is 0.83 and the industry's average debt-to-equity ratio is 1.56. The tax rate for Apex and the high energy battery sector is 25%. What is the industry's unleverage beta? What is the new division's leverage beta?
- 8. 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 0.85, the risk-free rate is 3.7%, and the market risk premium is 4.6%. If your firm's project is all-equity financed, estimate its cost of capital. The cost of capital is _____%. (Round to one decimal place.)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 0.83, the risk-free rate is 5%, and the market risk premium is 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 $24 per share, with 15 million shares outstanding. It also has $104 million in outstanding debt, with a yield on the debt of 4.8%. Thurbinar's equity beta is 1.00. b. Assume Thurbinar's debt has a beta of zero. 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…KT Enterprises is considering undertaking a new project. Based upon the analysis of firms with similar projects, KT has determined that an unlevered cost of equity of 12% is suitable for their project. KT's marginal tax rate is 35%, its borrowing rate is 7%, and KT does not believe that its borrowing rate will change if the new project is accepted. If KT expects to maintain a debt to equity ratio for this project of .6 then KT's equity cost of capital, rE, for this project is closest to: A. 5.0% B.12% C.15.0% D. 17.0%
- 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 0.85, the risk-free rate is 4%, and the market risk premium is 5%. If your firm’s project is all equity financed, estimate its cost of capital.Consider the setting of Problem 18. 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 15 million shares outstanding. It also has $100 million in outstanding debt, with a yield on the debt of 4.5%. Thurbinar’s equity beta is 1.00. (1) Assume Thurbinar’s debt has a beta of zero. Estimate Thurbinar’s unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar’s unlevered cost of capital. (2) 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. (3) Explain the difference between your estimates in part (1) and part (2). (4) You decide to average your results in part (1) and part (2), and then average this result with your estimate from Problem 18.…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 0.81, the risk-free rate is 4.1%, and the market risk premium is 5.4%. If your firm's project is all-equity financed, estimate its cost of capital.
- Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 6 percent return and can be financed at 3 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 14 percent return but would cost 16 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure. a. Compute the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Weighted average cost of capital b. Which project(s) should be accepted? O New machine. O Piece of equipment. %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 0.82, the risk-free rate is 4%, and the market risk premium is 5%. If your firm's project is all equity financed, estimate its cost of capital. The estimated cost of capital is% (Round to two decimal places.)Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 8 percent return and can be financed at 5 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 16 percent return but would cost 18 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm’s capital structure. a. Compute the weighted average cost of capital. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) b. Which project(s) should be accepted? multiple choice New machine. Piece of equipment.