The Cost of Capital, The Basics of Capital Budget, Cash Flow Estimation and Risk Analysis

Ballack Inc. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Ballanck’s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.7, the risk-free is 6%, and the market risk premium is 4.5%. What is Ballack’s WACC?


Ballack is considering the following projects for investment next eyar:

ProjectRequired InvetmentExpected Rate of Return

Each project has average risk, and Ballack accepts any project whose expected rate of return exceeds its cost of capital. How large should next year’s capital budget be?


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