Consider an entrepreneur with the following opportunity. For an initial investment of $1,400 this year, a project will g
Posted: Wed Mar 09, 2022 8:44 am
Consider an entrepreneur with the following opportunity. For an
initial investment of $1,400 this year, a project will generate
either cash flows of $1,000 or $3,000 whether the economy is weak
or strong. Both scenarios are equal probability. The risk free rate
is 5% and the risk premium of the project is 10%. Assuming the
capital markets are perfect, the entrepreneur will borrow $300 at
5% interest rate to finance the entire project. What is the cost of
equity for the project?
initial investment of $1,400 this year, a project will generate
either cash flows of $1,000 or $3,000 whether the economy is weak
or strong. Both scenarios are equal probability. The risk free rate
is 5% and the risk premium of the project is 10%. Assuming the
capital markets are perfect, the entrepreneur will borrow $300 at
5% interest rate to finance the entire project. What is the cost of
equity for the project?