- 5 The Cost Of Equity In Financial Analysis It Is Important To Select An Appropriate Discount Rate A Project S Discoun 1 (44.93 KiB) Viewed 33 times
5. 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 its cost of common equity. Sunny Co.'s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The
company has a beta of 1.80, the risk- free rate is 6.0%, and the market return is 7.8%. What is Sunny Co.'s cost of equity? O 9.24% O 14.12% O 33.88% O 3.32% Sunny Co. is financed exclusively using equity funding and has a cost of equity of 13.05%. It is considering the following projects for investment next year: Project Expected Rate of Return Required Investment $5,250 w 10.60% X $6,375 13.65% Y $4,575 14.10% Z $3,675 13.10% 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? O $9,825 O $13,500 O $14,625 O $15,300