With this beta we can then estimate the cost of

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Unformatted text preview: e of data: Yahoo! Finance and Value Line Investment Survey Bottom line: We can’t estimate the relevant, market risk of a project because this is not measurable directly. What we can do is use the market risk of a company in a similar, single line of business and then uses that company’s stock beta – with some adjustments for differing financial leverage – to estimate the beta for the project. With this beta, we can then estimate the cost of capital for the project. 4. Incorporating risk in the capital budgeting decision In using the net present value method to value future cash flows, we know that the discount rate should reflect the project's risk. In using the internal rate of return method, we know that the hurdle rate -- the minimum rate of return on the project -- should reflect the project's risk. Both the net present value and the internal rate of return methods, therefore, depend on using a cost of capital that reflects the project's risk. A. Risk-adjusted rate The cost of capital i...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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