how you would measure the cost of equity for investment projects.

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Expert Solution

The cost of equity refers to a rate of return which is required by the investors given the investments to be made. Firms frequently use it as a capital planning edge for the required rate of return. It speaks to the remuneration, the market requests in return for owning the advantage and bearing the risk of of proprietorship. The conventional equation for the cost of equity is the capital asset pricing model (CAPM).

The equation for CAPM is as follows:

Required Rate of Return= Risk free Rate + Beta (Market Return-Risk Free Rate)

Also in addition to above straight forward model stating the equation, an analyst also adds the risk premium to determine the financial viability of the project given the stream of cash flows. In other words, if the above discount rate stated by the model is augmented by a certain percentage of risk premium then a project having a higher risk can be better evaluated.

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jeff jeffy answered 2 months ago

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