In this chapter (Chapter 9) we are looking at the different costs of debt and equity to a firm. In the textbook the cost of equity is just the cost of dividends and equity flotation costs to shareholders. However, in many early stage ventures we do not offer dividends - we plow all the money right back into growth. This is one of the primary reasons why Amazon was not profitable for so many years.

(1) So, in this case, is the cost of equity zero? What are you really buying as an investor? What is the real cost of selling equity for the entrepreneur or existing owner(s) of the business (think Shark Tank)?

(2) Okay, let's return to the example of the Beatle's poster from the discussion in week 5. Just as a refresher, here are the details again:

You are considering an investment in an old Beatle's concert poster signed by the group. The T-bill rate is now hovering at ~4.0%.The required rate of return on vintage concert posters is 20%. Beatle's memorabilia is considered especially collectable so the risk is only half that of most concert posters of this age.Based on the CAPM, what rate of return should you expect to earn on your poster?

Please start by calculating this rate of return using the CAPM. Now let's assume that you purchased the poster with the intention of holding it one year. You can keep it safely in a drawer or you can have the poster framed and add a small copper plaque so you can hang it on your wall. This will add $200 to the cost of the poster, but will also increase the total resale value (including framing cost) by 50%.

Would it make sense to make this investment from a financial perspective? What other factors should you consider? Is there a way to put a financial value on these other factors?

Note: We are looking for you to build a simple financial model to do this analysis.

We have a short week.Let's just skip questions 3 & 4 and focus on the first two...

Sound fair?

(3) You are considering a major remodel of the kitchen in your home. Your choice of appliances and dcor (you have really good taste!) will cost ~$75,000. You can use your own savings or you can borrow money to do the upgrade (you do not have the option of selling equity). Your money is currently sitting in a Fidelity "money market" fund (your choice of fund). You can also choose to borrow money using a credit line at 9% APR. The good news is that 80% of the cost of this type of upgrade will be reflected directly in the sales price of your home.

So, what do you think? Should you do the upgrade (hint: the answer may not depend strictly on the numbers)? What factors are relevant? What is the best source of funding to use? How would you set the problem up to decide?

(4) What other ways could you use capital budgeting models to make decisions in your personal life? Could this work for something like buying a riding lawnmower? Of course, consumers don't usually have access to equity funding. However, are the models still valid? Please share an example of how you might use these techniques in your own