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: Markung's Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Markung's Co.'s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.65, the risk-free rate is 5.5%, and the market return is 7.2%. What is Markung's Co.'s cost of equity? 29.13% 8.31% 10.01% 19.08% Markung's Co. is financed exclusively using equity funding and has a cost of equity of 12.75%. It is considering the following projects for investment next year: Each project has average risk, and Markung's Co. accepts any project whose expected rate of return exceeds its cost of capital. How large should next year's capital budget be? $5, 870 $15, 425 $7, 230 $10, 825