Question

14- d. Explain how you would derive a required rate of return for your capital budgeting analysis. What type of information would you use to derive the required rate of return?

Answer 1

For Calculating Required Rate of Return we can use following formula
Rate = Weight of Debt* Cost of Debt*(1-Tax rate) + Weight of Equity * Cost of Equity + Weight of Preferred Stock* Cost of Preferred Stock
Information required
Weights are calculated through market value and not book values. Cost of debt is the YTM of bond, Cost of equity can be calculated through CAPM method and cost of preferred stock can be calculated using dividend of perpetuity calculation.

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