Question

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: Weghorst Co, is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Weghorst 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 Weghorst Co.'s cost of equity? O 21.84 % nus DAY SGIVING (CANADA 11.04% O 34.58% 9.24% Weghorst Co. is financed exclusively using equity funding and has a cost of equity of 12.25 %. It is considering the following projects for investment next year: Project Required Investment Expected Rate of Return W $54,675 13.65% 9.60% X $42,450 $27,575 13.10% Y z $32,875 11.10 % Each project has average risk, and Weghorst Co. accepts any project whose expected rate of return exceeds its cost of capital. How large should next year's capital budget be? O $75,325 O$124,700 O $82,250 29 $87,550 Flash Player WIN 32,0,0,270 23 3.34.1 2004-2016 Aplia. All rights reserved. 2013 Cengage Learning except as noted. All rights reserved. Grade It Now Save & Continue

Answer 1

1.
=risk free rate+beta*(market return-risk free rate)
=6%+1.8*(7.8%-6%)
=9.24%

2.
=54675+27575
=82250
We will accept those projects which have expected return more than the cost of equity. Hence, we will accept W and Y

3.
Interest rates in the economy
Tax rates

4.
Accept the project

5.
Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division