5. The cost of equity In finandal analyais, it is important to select an appropriate discount rote. A project's discount rate must be high to compensate investors for the project's risk. The retum that ahareholders reeuire from the company as a compensation for their investment risk is referred to as the cost of equity. Consider this caser The Mitata Co, is a 100\% equity financed compary (no debt or preferred stodk), hence, its wacc equals its cost of common equity. The Mata cais retained carnings will be sulficient to fund iss capital budget in tha foreseeable future. The company has a beta of 1.35, the riskefree rate is 4.5%, and the market return is 5.9%. 19.08% 1.95% a.02*4 The Nitata Co. is finanoed exclusively using equity funding and has a cost of equily of 13.05%. It is considering the follewing projects for investencent nect years. neat year: \begin{tabular}{ccc} \hline Project & Regulred Investment & Expected Rente of Return \\ \hline W & $5,250 & 10.60% \\ X & $6,375 & 13.65% \\ Y & $4,575 & 14.10% \\ Z & $3,675 & 13.10% \\ \hline \end{tabular} Esch grojicet its everage riak, and The vatuta Co, accepti any prejcct whose expected rate of retum excecth its cost of capital, How lorge bheuld nat yearis cipital budget be? 415,300 $13,500 $2,185 $14,625