In the link below, you will explore how companies compute their cost of capital by computing a weighted average of the three major components of capital: debt, preferred stock, and

In the link below, you will explore how companies compute their cost of capital by computing a weighted average of the three major components of capital: debt, preferred stock, and common equity. The firm’s cost of capital is a key element in capital budgeting decisions and must be understood in order to justify capital projects. In addition, you will also learn capital budgeting techniques including Payback, Net Present Value, Internal Rate of Return, etc. For this Discussion, imagine the following scenario: Based on the scenario above, post your reactions to the following questions and concerns: is your reaction to Harriet’s suggestion of using the cost of debt only? Is it a good idea or a bad idea? Why? Do you think capital projects should have their own unique cost of capital rates for budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost of equity capital as computed by CAPM? about the relatively high risk inherent in this project? How can you factor into the analysis the notion of risk so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field?

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