In financial analysis, it is important to select an appropriate discount rate. A projects discount rate must be high to compensate investors for the projects 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?

9.24%

3.32%

14.12%

33.88%

Sunny Co. is financed exclusively using equity funding and has a cost of equity of 11.85%. It is considering the following projects for investment next year: Project, Required Investment, Expected Rate of Return W,$8,750,10.10%. X,$4,375,13.65%. Y,$2,150,14.60%. Z,$9,950,14.10%. Each project has average risk, and Sunny Co. accepts any project whose expected rate of return exceeds its cost of capital. How large should next years capital budget be?

$16,475

$20,850

$25,225

$15,275