The cost of equity 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 As cost of common equity. Sunny Co.'s retained earnings will be sufficient to fund its capital budget m the foreseeable future. The company has a beta of 1.20, the risk-free rate is 4.0%, and the market return is 5.2%. What is Sunny Co.'s cost of equity? 6.64% 15.54% 11.44% 5.44% Sunny Co. is financed exclusively using equity funding and has a cost of equity of 13.00%. It is considering the following projects for investment next year: 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 year's capital budget be? $20, 500 $29,250 $15,250 $14,000