Question
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
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: Hack Wellington Co is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Hack Wellington Cos retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.35, the risk-free rate is 4.5%, and the market return is 5.9%. What is Hack Wellington Cos cost of equity? 6.39% 8.02% 1.95% 19.08% Hack Wellington 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 Expected Rate of Return W $19,825 14.60% X $22,375 13.10% Y $11,275 12.10% Z $15,675 13.65% Each project has average risk, and Hack Wellington Co accepts any project whose expected rate of return exceeds its cost of capital. How large should next years capital budget be? $57,875 $26,950 $49,325 $38,050
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