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knowledge bank -basic learning Cost of Capital-2

Q1.What is the critical assumption inherent in the Capital Asset Pricing Model as it relates to the acceptance criteria for risk investments?

Q2.Instead of using a expected return on market portfolio and the risk free rate of return in a CAPM approach to estimating the required return on equity , how would one use a firms debt cost in a CAPM type approach to estimate the firms required rate of return on equity?

Q3.What is the purpose of proxy companies in the application of the capital asset pricing model to estimating required returns?

Q4.Should companies in the same industry have approximately the same required rate of returns on investment projects? Why or why not?

Q5.If you use debt funds to finance a project, is the after tax cost of debt the required return for the project? As long as the project earns more than enough to pay interest and service the principal, does it not benefit the firm?

Q6.Should a company with multiple divisions establish separate required rates of returns for each division as opposed to using an overall weighted cost of capital ? Explain.

Q7.For a company investing in capital projects, how is value created by using required return calculations?

Q8.What are the sources of value creation through capital investment decisions?

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