Assume that the firms cost of equity capital is 10 percent and that the firms existing assets

Question:

Assume that the firm’s capital is 10 percent and that the firm’s existing assets and operations generate a 10 percent return on common equity. If the firm raises additional equity capital and invests in assets that will generate a return less than 10 percent, what effect will that investment have on the firm’s residual income? If the firm raises additional equity capital and invests in assets that will generate a rate of return that exceeds 10 percent, what effect will that investment have on the firm’s residual income?

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...