Weghorst Co. is a 100% equity-financed company (no debt or preferred stock); hen

Question

Weghorst Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC eqals its cost of common equity. Weghorst Co.'s retained earnings will be sufficient to fund it's capital budget in the foreseeable future. The company has a beta of 1.50, the risk-free rate is 5.0%, and the market return is 6.5%. What is Weghorst Co's cost of equality?

A. 16.25%

B. 24.13%

C. 8.75%

D. 7.25%

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:

A. $34,550

B. $24,225

C. $36,825

D. $56,250

Explanation / Answer

1. cost of equity = risk free rate+beta*(market return - risk free rate)

= 5%+1.50*(6.5% - 5%) = 5%+2.25% = 7.25%. answer is option "d'.

2. cost of equity = cost of capital in this case. It is 10.65%

Project X and Y have a rate of return, at 14.6% and 14.1% respectively, that is higher than the cost of capital.

capital budget = required investment for Project X and Y = 13250+10975 = $24,225

answer is option "b".

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