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: 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? 14.12% 9.24% 33.8896 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:

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Add-Ins - 2x General Wrap Text Merge & Center - $ % , :.: File Home Insert Page Layout Formulas Data Review View % Cut Calibri -11AA = = = Dr Ea Copy Paste Format Painter BI U D- DA Clipboard Font Alignment JN149 - five JH J JJ JK Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Formatting as Table Styles Styles Find & Select Number Cells JL JM JN JO JP JQ JR JS 148 SUNNY'S COST OF EQUITY 149 150 151 ke = 152 153 Rf + beta(Rm-Rf) 6% + 1.80(7.8%-6%) 9.24% ANS 1 ke = 154 155 156 157 PROJECT INVESTMENT EXPECTED RATE OF RETURN w 5250 10.60% 6375 13.65% 4575 14.10% 3675 13.10% X COST OF EQUITY 13.05% 13.05% 13.05% 13.05% DECISION REJECT ERR <COST OF EQUITY ACCEPT ERR > COST OF EQUITY ACCEPT ERR > COST OF EQUITY ACCEPT ERR > COST OF EQUITY 158 159 160 ANS 2 CAPITAL BUDGET = 6375 + 4575 + 3675 = 14625 161 162 163 164 165 HE N Rea convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: GZ39 YIELD bond portfolio cap stru WACC 200 140% B 9 . * . 10 RESI el 0 + . ENG 31-10-2019