Capital budgeting case
This assignment is a capital budgeting case with an extra twist in which you also need to figure out the firm’s cost of capital. This involves a step-by-step process in which you will calculate the cost of debt, the cost of equity, and the weights of debt and equity. (Note that the firm uses short-term debt in the form of a revolving line of credit, which has a particular interest rate, as well as long-term debt, which has a different yield.) Please show your work in an excel spreadsheet that uses cell references and formulas.
In calculating the cost of equity, you can use CAPM. You will need to find beta, which can be done by regressing the returns for the company on the market returns over the same period. That is, the company’s returns would be the dependent variable, and the market returns will be the independent variable. The slope of this regression is the beta for the company, similar to slides 19
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