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    Cost of Capital for Average, High and Low Risk Projects

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    Suppose a firm estimates its cost of capital for the coming year to be 10 percent. What are reasonable costs of capital for evaluating average-risk projects, high-risk projects, and low-risk projects?

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    The WACC is simply the cost of the several types of capital (called capital components) used by a firm, weighted by their proportions in the firm's capital structure. In order to calculate the WACC, the analyst has to estimate:
    - the cost of debt
    - the cost of preferred stock, and
    - the cost of common stock

    Risk exists because of the ...

    Solution Summary

    This solution explains WACC, risks associated with an investment, and risk premium for risky projects. This solution is 230 words.