Use the following information to estimate the VentureBanc investors' target rate of return:
RATE COMPONENT RETURN
COMPONENT
Liquidity premium ............ 5%
Risk-free rate .............. 6%
Advisory premium ............. 9%
Market risk premium ......... 7.5%
Hubris projection premium ......... 15%
A. VentureBanc uses a systematic risk measure of 2.0. Based on the information shown, estimate VentureBanc's investment risk premium. Then estimate the cost of equity capital for VentureBanc.
B. Determine the rate components and their returns that a venture investor like VentureBanc would require to be covered beyond a traditional cost-of-equity estimate.
C. What overall venture investment discount rate would be used by VentureBanc?