Hi friends,
I have a question about capital asset pricing model equation. It's an
example on page B3- 87 of Becker CPA BEC (2007 edition). The example is:
"Assume that the Carlin Company wants to compute its cost of equity capital
using the CAPM formula and that the Treasury Bill rate is 7%, the market
rate is 16%, and the beta of Jasmine Corporation, which is considered to be
comparable to Carlin, is 1.2. What is the cost of equity capital for Carlin?
C= 7%+(16%-7%) X 1.2=17.8%
Therefore, any investment that yields greater than a 17.8% retrun and
requires a 100% equity investment should be pursued by Carlin because it
will improve the value of the company. "
Ok. My question is: why is says "requires a 100% equity investment should be
pursued by Carlin", so Carlin MUST (since it's REQUIRED) invest its 100%
equity? Can anyone help me think it thoroughly? Thank you in advance!!!
capital structure issue; and pls distinguish between ROI (return on investment) and ROE (return on equity)
if the investment can be partially funded by debt, which typically shall cost less than the cost of equity (17.8% in this case), then it is possible for a project that generates lower-than-17.8% ROI, but is still attractive on ROE basis (i.e. could generate greater than 17.8% ROE)
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