Corporate Finance
Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
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Chapter 13, Problem 1CQ

Project Risk If you can borrow all the money you need for a project at 6 percent, doesn’t it follow that 6 percent is your cost of capital for the project?

Expert Solution & Answer
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Summary Introduction

To determine: The respond to the given statement.

Introduction:

The cost of capital is the WACC (Weighted Average Cost of Capital) is the total rate of return for a company which anticipates reimbursing all their investors. It is considered as a financing resource in the target capital structure of a company and it measured in terms of weights of fractions.

Explanation of Solution

Statement: If money borrowed at 6% doesn’t it follow that 6% percent as cost of capital for the project?

“No the statement is false”

Reason:

Because the cost of capital of a project is based on the riskiness of a project. Additionally the origin of money will not considered as cost of capital.

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Students have asked these similar questions
Discuss in full detail, if you can borrow all the money you need for a project at 6 percent, doesn’t it follow that 7 percent is your cost of capital for the project?
Assume that you have two investment alternatives: the first project produces $125 for sure, and the second project produces $150 with probability 2/5. You can borrow $110 from your financial institution for one project (investment) if you show an asset as a collateral. Suppose that you maximize your expected profit, what would be the minimum level of collateral that make you select the safe project?
3. You are considering a project that has an initial outlay of $1million. The profitability index of the project is 2.24. What is the NPV of the project?
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