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American Recovery and Reinvestment Act of 2009

I need help identifying a clearer definition of risk and cost of capital for levered equity and risk and return of unlevered equity. Also what other decisions should a firm consider about cost of capital if they plan on undertaking multiple projects.

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Risk and Cost of Capital for Levered Equity

Levered equity is that capital structure of a firm consists of both equity and debt for financing. The definition of risk and cost of capital for levered equity is discussed below:

Levered Risk:
For levered equity, risk can be defined as premium that is proportional to the market value of debt-equity ratio or difference between market rate and risk free rate. The risk of levered equity is higher for a firm due to use of different sources of finance (Bierman, 2010). For example, a levered equity has an expected return of either 74% or -51% in which negative percentage shows the degree of risk.

Levered Cost of Capital:
The cost of capital for levered equity can be defined as total of debt financing cost and equity financing cost. It is because a leverage firm uses both debt and equity as source of financing to arrange fund. The cost of capital for levered equity also represents as total of unlevered cost of capital and premium (Armitage, 2005). According to ...

Solution Summary

The expert examines the American recovery and Reinvestment Act of 2009. The cost of capital if they plan on undertaking multiple projects is determined.

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