Question

In: Finance

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

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

Solutions

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.

If you still have any doubt, then please ping me in the comment box, I would love to help you.

jeff jeffy answered 8 months ago
Next > < Previous

Related Solutions

You are considering an investment in two projects, A and B. Both projects will cost $115,000,...
You are considering an investment in two projects, A and B. Both projects will cost $115,000, and the projected cash flows are as follows: YEAR PROJECT A PROJECT B 1 $7,188    $51,750 2 $21,562    $38,812 3 $40,250    $28,750 4 $50,315    $21,563 5    $57,500 $14,375 Using Excel and show formulas a. Assuming that the WACC is 9.4%, calculate the payback period, discounted payback period, NPV, PI, IRR, and MIRR. If the projects are mutually exclusive, which...
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$64.19. The firm just recently paid a dividend of ​$4.04. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$2.99. After underpricing and flotation​ costs, the firm expects to net $58.41 per share on a new issue. A. Determine average annual dividend growth rate over the past 5 years. Using that growth​...
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $41.16. The firm just recently paid a dividend of $3.97. The firm has been increasing dividends regularly. Five years ago, the dividend was just $2.99. After underpricing and flotation costs, the firm expects to net $38.28 per share on a new issue. a. Determine average annual dividend growth rate over the past 5 years. Using that growth...
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$65.88. The firm just recently paid a dividend of ​$3.98. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.04. After underpricing and flotation​ costs, the firm expects to net ​$61.93 per share on a new issue. a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​...
Discuss how you would measure the level of emotional intelligence and how it would contribute to...
Discuss how you would measure the level of emotional intelligence and how it would contribute to harmonious and effective management of a company's human resource.
Describe how you would design the experiment, what you would measure, and how you could determine...
Describe how you would design the experiment, what you would measure, and how you could determine the specific heat capacity of water.
As director of capital budgeting, you are reviewing three potential investment projects with the following cost...
As director of capital budgeting, you are reviewing three potential investment projects with the following cost and cash flow projections. Cash Flow Project A Project B Project C Investment Cost ($400,000) ($375,000) ($400,000) Year One Cash Flow $200,000 $75,000 $50,000 Year Two Cash Flow $50,000 $75,000 $120,000 Year Three Cash Flow $75,000 $85,000 $140,000 Year Four Cash Flow $50,000 $225,000 $125,000 Year Five Cash Flow $125,000 $60,000 $125,000 1.Calculate the Internal Rate of Return (IRR) for each project. 2.Assuming your...
As director of capital budgeting, you are reviewing three potential investment projects with the following cost...
As director of capital budgeting, you are reviewing three potential investment projects with the following cost and cash flow projections. Cash Flow Project A Project B Project C Investment Cost ($400,000) ($375,000) ($400,000) Year One Cash Flow $200,000 $75,000 $50,000 Year Two Cash Flow $50,000 $75,000 $120,000 Year Three Cash Flow $75,000 $85,000 $140,000 Year Four Cash Flow $50,000 $225,000 $125,000 Year Five Cash Flow $125,000 $60,000 $125,000 1.Calculate the Payback Period for each project. 2.If the discount rate for...
How do you calculate risk and cost in capital projects?
How do you calculate risk and cost in capital projects?
How would you measure the level of globalization of a country or region? Or, what are...
How would you measure the level of globalization of a country or region? Or, what are globalization indicators? Please focus on economic and business globalization, finance in particular. Use theories and concepts learned from this course to state your viewpoint. Please discuss (list, identify, describe, outline, select, relate, or judge) from at least three different perspectives.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT