We are looking at the different costs of debt and equity to a firm. In the textbook the cost of equity is just the cost of dividends and equity flotation costs to shareholders. However, in many early stage ventures we do not offer dividends - we plow all the money right back into growth. This is one of the primary reasons why Amazon was not profitable for so many years.

(1) What is the cost of equity zero? What are you really buying as an investor? What is the real cost of selling equity for the entrepreneur or existing owner(s) of the business (think Shark Tank)?

(2) Let's return to the example of the Beatles's poster from the discussion in week 5. Just as a refresher, here are the details again:

You are considering an investment in an old Beatles concert poster signed by the group. The T-bill rate is now hovering at ~4.0%.The required rate of return on vintage concert posters is 20%. Beatles memorabilia is considered especially collectible so the risk is only half that of most concert posters of this age.Based on the CAPM, what rate of return should you expect to earn on your poster?

Please start by calculating this rate of return using the CAPM. Now let's assume that you purchased the poster with the intention of holding it one year. You can keep it safely in a drawer or you can have the poster framed and add a small copper plaque so you can hang it on your wall. This will add $200 to the cost of the poster, but will also increase the total resale value (including framing cost) by 50%.

Would it make sense to make this investment from a financial perspective? What other factors should you consider? Is there a way to put a financial value on these other factors?

Note: We are looking for you to build a simple financial model to for this analysis.