You are to assume that a firm’s cost of capital is 10%. Using this information, what are reasonable costs of capital for evaluating average-risk projects, high-risk projects, and low-risk projects. Based on your knowledge about this subject, I should have an estimated cost of capital for each of these 3 projects.
Fin215 - drwls, Friday, February 1, 2008 at 7:15pm
You are wasting your time here, and ours. This question has been answered twice
Fin215 - JM, Friday, February 1, 2008 at 7:22pm
Then point me in the right direction and I will gladly quit "wasting" your time. Please.
Fin215 - Ms. Sue, Friday, February 1, 2008 at 7:37pm
This is a poorly written question.
It states that a firm's cost of capital is 10%. That is, it pays 10% for borrowing money.
Why, then, does the question asks for "reasonable costs of capital" depending upon the risk involved?
As a borrower, the firm may be willing to pay a higher cost for a low risk investment, such as a mortgage on a building in a thriving market. But, if gambling upon a risky project, the firm's directors may not be willing to borrow money unless at a low cost.
Please check with your instructor about this question. Also check your text materials, remembering that the question states, "Based on your knowledge about this subject . . .
Fin215 - drwls, Friday, February 1, 2008 at 9:34pm
I refer you to: http://www.jiskha.com/display.cgi?id=1201901472
Fin215 - drwls, Saturday, February 2, 2008 at 1:42pm
10%, 10% and 10% is my answer.
Regardless of the risk of a project, that is the actual market interest rate for that company, according your statement of the problem. It is the prospective reasonableness (risk/reward) of the PROJECT, not the "reasonable" interest rate (capital cost), that needs to be be evaluated.