When we compute the cost of equity capital for a project we assume that the of the project is equivalent to the average risk of the firm's investments.

Question

Quizplus · Accepted Answer

The cost of equity is typically determined through the Capital Asset Pricing Model (CAPM) which uses the firm's beta as a measure of market risk or systematic risk. The assumption is that the project's risk is equivalent to the firm's risk level, and since the beta measures the risk of the firm's overall portfolio, it is the appropriate factor to use in determining the cost of equity for the project.

When We Compute the Cost of Equity Capital for a Project