Cost of Capital - Firms Estimate
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Let's say 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? Little difficulty with this and needing to evaluate all scenarios....
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Solution Summary
The reasonable costs of capital for evaluating average-risk projects, high-risk projects, and low-risk projects are discussed for a cost of capital for the coming year being 10 percent.
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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 inability ...
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