1. Describe the role a company's cost of capital plays in capital budgeting for both net present value (NPV) and internal rate of return (IRR) calculations. What are the rules for capital budgeting decisions that are made based on NPV and IRR. Explain how the dollar value of a project's NPV relates to the overall value of the firm. The NPV profile graphs NPV values on the y-axis and discount rates on the x-axis. If Project X's profile crosses the x-axis at the 20% value, what does this tell us about the project?
2. Define the cost of equity capital. Is it an accounting cost? If not, what is it? Is it a low cost source of capital or a high cost source compared to other possible sources of capital? Explain. What would happen to a firm if it failed to deliver to its common stockholders the cost of equity capital? This question refers only to common equity.