posted by JM on .
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? Please help .
This question was posted last week and has been posted all over the internet. We have no way of answering it becasue the level of risks are not quantitatively defined, and because the cost of capital TO A COMPANY is whatever the banks or bond market say it is (10% here), regardless of the risk level assigned internally by the company.
What if I just picked an operating capital of say 2M and used the current rates on low and high risk bonds added to the 10%, would this give me an answer for the three situtations?
The amount of your operating capital should not matter. In a related answer, Ms Sue has wisely said that a company should require a lower cost of capital to justify higher-risk projects.
If you use a phrase from your question for a google search, you will see that it has been posted verbatim at many Q&A sites. Some have provided answers, for a small fee. You are welcome to explore them.
a firm estimates its cost of capital for the coming year to be 10 percent.