Justifying Your Cost of Capital Assumption

This week your team will need the weighted average cost of capital to use for each project. For projects in the existing line of business the appropriate cost of capital is the firms cost of capital (or in Chipotle’s case an 8% cost of capital is warranted). For project outside the normal course of business, the cost of capital must be adjusted up or down from the corporate rate compensate for the increased risk or the decrease risk brought to the corporation by the acceptance of this project. Specifically, please do the following:

1) In the first paragraph describe how the project will bring risk to the company or decrease the risk of the company. If the project is outside the normal operations of the firm, such as entering a new line of business, then look up the betas for firms in that business and average the betas for these firms, recalculate the cost of equity for this project, find the average debt to asset level in this new industry, and then recalculate the weighted average cost of capital for the project. If you do not believe the project changes the risk profile of the company, please stabcqte this and your reasoning.

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