In financial analysis, it is important to select an appropriate discount rate. A projects discount rate must be high to compensate investors for the projects risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity.

Consider this case:

The Mitata Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. The Mitata Co.s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.35, the risk-free rate is 4.5%, and the market return is 5.9%.

What is The Mitata Co.s cost of equity?

19.08%

8.02%

1.95%

6.39%

The Mitata Co. is financed exclusively using equity funding and has a cost of equity of 13.05%. It is considering the following projects for investment next year:

Project	Required Investment	Expected Rate of Return
W	$5,250	10.60%
X	$6,375	13.65%
Y	$4,575	14.10%
Z	$3,675	13.10%

Each project has average risk, and The Mitata Co. accepts any project whose expected rate of return exceeds its cost of capital. How large should next years capital budget be?

$13,500

$14,625

$9,825

15,300