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Attempts Do No Harm: 2 5. The cost of equity In financial analysis, it is important to select an appropriate discount rate. A project's discount rate must be high to compensate investors for the project's 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 Shoe Building Inc. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. The Shoe Building Inc.'s retained earningsl be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.50, the risk-free rate is 5.0%, and the market return is 6.5%. What is The Shoe Building Inc.'s cost of equity? o 8.75% 0 24.13% 7.25% O 16.25% The Shoe Building Inc. is financed exclusively using equity funding and has a cost of equity of 10.65%. It is considering the following projects for investment next year