Please share whether you agree or disagree with my view of the use of the company's capital in the scenario below. Explain your reasoning.

I am opening a tutoring business using $5000 (D) of debt in the form of a loan from my bank at 12% (Rd) interest. I will also use $3000 (E) dollars of my own equity which I will assess at a cost of 11% (Rd). My tax rate will be 32% (T).

The WACC is as follows

WACC = [E/E+D]*Re + [D/E+D]*Rd (1-T)

WACC = [3000/(3000+5000)] x 0.11 + [5000/(3000+5000)] x 0.12 x ( 1 - .32)

WACC = (0.375 x 0.11) + (0.625 x .12) x 0.68

WACC = 7.9%

The main issue with varying the techniques for the cost of capital is ensuring that the appropriate method is selected. There are some methods that require estimates which are not necessary if the division or product has similarities and/or established costs in the organization. If this is the cases the WACC can be used. However, the WAC should not be used for all projects and divisions as some are inherently riskier and require additional attention and analysis. In this scenario, a riskier and more expensive investment would require additional capital and would receive a greater share of it without the in-depth consideration it deserves. Instead, the more expensive and riskier investments should be accounted for and analyzed using the Risk Adjusted Discount Rate (RADR) along with the use of a Project Beta. The RADR allows the organization to fully consider the increased risk a project has while the beta allows for the organization to use the decisions and history of similar industry participants to accurately account for some of the financial considerations that are necessary.

AFowler Disc2w4

I completely agree with your view that risk adjusted discount rate should be used to valueprojects which are inherently riskier than the risk associated with the company.Beta measures risk...