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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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Solution Summary

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

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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 ...

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