I have these four set of questions, and I don\'t know how to answer them since I

Question

I have these four set of questions, and I don't know how to answer them since I don't know the formulas and stuffs - Can you please explain them in a simple way, it doesn't have to be explained briefly, just need a short a simple answer for these questions

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Question 2: Lecture Question

How can we estimate a firm or project beta?

Question 3: Lecture Question

How does leverage affect beta?

Question 4: Lecture Question

How do we determine the weighted average cost of capital?

Question 5: Lecture Question

How do flotation costs affect the capital budgeting process?

Explanation / Answer

1. The project or firm beta can be estimated on the basis of the historical values. Based on the line of business, and the historical values, the beta can be calculated by comparison with the similar firms. So, on the basis of comparison, the value of beta can be calculated.

2. Leverage affect beta as Beta of leveraged firm = Beta of unlevering firm * ( 1 + (1-T)*(D/E))

So, beta increases with the leverage.

3. The WACC can be calculated as:

Cost of Equity*Weight of Equity + Cost of Debt*(1-Tax Rate)*Weight of Debt

4. The floatation costs affect the capital budgeting process, as the cost of floatation increases, the net cost of capital increases. Hence with that project becomes less feasible for taking up.

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