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 1.35, the risk-free rate is 4.5%, and the market return is 5.9%.   What is Weghorst Co.’s cost of equity? 1.95%   19.08%   8.02%   6.39%     Weghorst Co. is financed exclusively using equity funding and has a cost of equity of 10.65%. It is considering the following projects for investment next year: Project Required Investment Expected Rate of Return W $23,575 9.65% X $13,250 14.60% Y $10,975 14.10% Z $32,675 9.70%   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? $36,825   $56,250   $45,925   $24,225

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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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 1.35, the risk-free rate is 4.5%, and the market return is 5.9%.
 
What is Weghorst Co.’s cost of equity?
1.95%
 
19.08%
 
8.02%
 
6.39%
 
 
Weghorst Co. is financed exclusively using equity funding and has a cost of equity of 10.65%. It is considering the following projects for investment next year:
Project
Required Investment
Expected Rate of Return
W $23,575 9.65%
X $13,250 14.60%
Y $10,975 14.10%
Z $32,675 9.70%
 
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?
$36,825
 
$56,250
 
$45,925
 
$24,225
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