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Questions

Yоur firm is plаnning tо invest in а prоject. Comoros Industries is аn​ all-equity firm that specializes in this business. Suppose​ the equity beta of Comoros is 0.85​, the​ risk-free rate is 5%​, and the market risk premium is 6%. a. If your​ firm's project is​ all-equity financed, estimate its cost of capital. (10 pts) 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, Solomon​ Design, which is also engaged in a similar line of business. Solomon has a stock price of $20 per​ share, with 14 million shares outstanding. It also has $120 million in outstanding​ debt, with a yield on the debt of 4.5%. ​Solomon's equity beta is 1.20. b. Assume​ Solomon's debt has a beta of zero. Estimate​ Solomon's unlevered beta. Use the unlevered beta and the CAPM to estimate​ Solomon's unlevered cost of capital. (15 pts)