Lets return to the case involving Apples project for the Smart TV. In Week 2, we estimated the cash flows, which is the first step in analyzing project. We now need to estimate Apples cost of capital in order to continue our analysis of the project.

Use the 10 year Treasury Bond rate as the risk free rate and assume that the market risk premium is 7% to find Apples cost of equity. Assume that Apples bonds are rated AAA and that Apples corporate tax rate is 21%. Assume that Apples bonds have no floatation costs, but the cost of issuing equity is 3%. Find Apples weighted average cost of capital. Assume that the project will be financed with internal funds. You will need to find additional financial information from the Wall Street Journal and online at sites like http://finance.yahoo.com to complete your calculation.

Do this analysis in the same spreadsheet where you computed the operating cash flows for the project. Next week, when we tackle capital budgeting, well use these cost of capital and cash flow estimates to determine if the project is desirable.