Your firm is planning to invest in an automated packaging plant, and you are trying to determine the cost of capital of this project. You find two comparable firms in the industry to guide your estimation. Harburtin Industries is an all-equity firm that specializes in this business. Harburtin's equity beta is 0.85. The second firm, Thurbinar Design, has a stock price of $20 per share, and 15 million shares outstanding. It also has $100 million in outstanding debt. Thurinar has an equity beta of 1.00, and debt beta of 0.3. You decide to use the average unlevered beta of the two comparison firms as the estimation of your firm's unlevered beta. Suppose, your target debt-to-equity ratio is 25% to fund the project, and your firm can borrow at 5.5% rate. Your firm also has a debt beta of 0.3. The risk-free rate is 4%, the market premium is 5%, and the corporate tax rate is 40%. What is the appropriate WACC for the automated packaging plant?

2.   Newkirk is considering the construction of a new facility in Oklahoma. The facility will cost Newkirk $500 million capital. The firm is considering a target debt-to-equity ratio of 0.25 for this project. Newkirk has two financing options: 1) corporate financing, where the debt capital needed comes from corporate debt; or 2) project financing, through nonrecourse debt of the new entity Oklahoma Plant. The company currently has total assets of $1,800 million, including $800 million of debt and $1,000 million of equity. Show abbreviated balance sheets for the following:

a.     Newkirk before the investment of the facility;

b.    Newkirk after the investment of the facility if corporate financing is used;

c.     Newkirk and the Oklahoma Plant, if project financing is used.

Answer rating: 100% (QA)

Problem 1 Cost of Capital for Automated Packaging Plant Heres the calculation for the WACC of the au... View the full answer