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In financial analysis, it is important to select an appropriate discount rate. A project's discount rate must be high to compensate investors for the project's
In financial analysis, it is important to select an appropriate discount rate. A project's discount rate must be high to compensate investors for the project's risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity. Consider this case: Sunny Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Sunny Co.'s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.80, the risk- free rate is 6.0%, and the market return is 7.8%. What is Sunny Co.'s cost of equity? 14.12% 9.24% 33.8896 3.32% Sunny Co. is financed exclusively using equity funding and has a cost of equity of 13.05%. It is considering the following projects for investment next year: Sunny Co. is financed exclusively using equity funding and has a cost of equity of 13.05%. It is considering the following projects for investment next year: Project Required Investment $5,250 $6,375 $4,575 $3,675 Expected Rate of Return 10.60% 13.65% 14.10% 13.10% Each project has average risk, and Sunny Co. accepts any project whose expected rate of retum exceeds its cost of capital. How large should next year's capital budget be? $9,825 $13,500 $15,300 $14,625
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