Your firm is planning to invest in a new power generation system. The company is an all-equity firm that specializes in this business. Suppose the company's equity beta is 0.9, the risk-free rate is 6.2%, and the market risk premium is 8%. If your firm's project is all-equity financed, then your estimate of your cost of capital is closest to:
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Your firm is planning to invest in a new power generation system. The company is an all-equity firm that specializes in this business. Suppose the company's equity beta is 0.9, the risk-free rate is 6.2%, and the market risk premium is 8%. If your firm's project is all-equity financed, then your estimate of your cost of capital is closest to:
The Capital Asset Pricing Model (CAPM) refers to the model which tells us how the financial markets price their securities and therefore helps in determining or calculating the expected returns on the capital investments. It is used in finance to measure the expected returns from risky assets with the help of costs of capital and risk from those assets. The beta measures the riskiness of the assets. This model helps the investors in calculating the risk of the investment and the rate of return that they should expect from the investment.
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