UP.FRONT TEACHING: Semetmes, to estmate the beta for a given project and, in Aurn, caloulate the apcrocnate cost. of cucital [i.e, requiced retum] for that project, we can bok bo an existing firm and use its woighted-ayerage cost of capital. This approach relies on the existry enterprise [le._ mic of currerh assets, oument liabistias, and long-term assets] having the same nisk [i.e, the sime assiet bestl as the project being erilaated. If this condiron is satsiod, then the required retum [also calleg "cost ef captal'] facing the enterprise is the appropriase required rehum falso callod "cost of capial" for the project under consideration. Tris approach is often caled the "pure play" approach the existing company locks a lof lke a "pure, exissing weraion" of the projoct that weire ewabuatirg Kesping things a bit sit?plsie. we assume that the existing frmis capital structure is al-equily, melring that the fmis assol bota wil be the same as the firmis equily bela. If the firm's asset betas is the same as the frm's equily beta, then the required retum on the frin's. assets [le., mix of current assets, ourent lablines (yes), and long-rerm dssots] wil be the same as the required retum on the firm's equity. Recall that the project that weire interested in just locks like a scaled version of the exising enterprise; thus, the required rotum facing the cutaide enterprise is the appropriate required return for the project. pway. so let's move on to a problem that, work-wise, will gake much less fime than you spont reading and underssending this undertying tulerial. The appropriate cost of capital for your automated-packiging-plant project is Y.. (Focind to two decimaf places ) UP.FRONT TEACHING: Semetmes, to estmate the beta for a given project and, in Aurn, caloulate the apcrocnate cost. of cucital [i.e, requiced retum] for that project, we can bok bo an existing firm and use its woighted-ayerage cost of capital. This approach relies on the existry enterprise [le._ mic of currerh assets, oument liabistias, and long-term assets] having the same nisk [i.e, the sime assiet bestl as the project being erilaated. If this condiron is satsiod, then the required retum [also calleg "cost ef captal'] facing the enterprise is the appropriase required rehum falso callod "cost of capial" for the project under consideration. Tris approach is often caled the "pure play" approach the existing company locks a lof lke a "pure, exissing weraion" of the projoct that weire ewabuatirg Kesping things a bit sit?plsie. we assume that the existing frmis capital structure is al-equily, melring that the fmis assol bota wil be the same as the firmis equily bela. If the firm's asset betas is the same as the frm's equily beta, then the required retum on the frin's. assets [le., mix of current assets, ourent lablines (yes), and long-rerm dssots] wil be the same as the required retum on the firm's equity. Recall that the project that weire interested in just locks like a scaled version of the exising enterprise; thus, the required rotum facing the cutaide enterprise is the appropriate required return for the project. pway. so let's move on to a problem that, work-wise, will gake much less fime than you spont reading and underssending this undertying tulerial. The appropriate cost of capital for your automated-packiging-plant project is Y.. (Focind to two decimaf places )
