| Course | MAT 444 Finance for Managers |
|---|---|
| Module | Module 5 |
| Paper type | Cost of capital analysis |
| Length | About 1,056 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | Business Administration |
| Updated | October 2026 |
Free sample paper for MAT 444 Module 5
Why 15 Percent? Building a Fabricator's Cost of Capital From the Ground Up and Comparing It With the Hurdle the Owners Use
Student Name
Business Administration Program, Aspen University
MAT 444: Finance for Managers
Instructor Name
Month Day, Year
Why 15 Percent? Building a Fabricator's Cost of Capital From the Ground Up and Comparing It With the Hurdle the Owners Use
For as long as anyone at Haverstock Fabrication can remember, the owners have approved new equipment only if it promised a 15% return. Nobody can say where the figure came from. With the $2.4 million laser cutting cell under review, the controller has been asked to put a figure on what Haverstock's money really costs, meaning the yearly return lenders and owners together expect from money placed in projects of average risk for the business. This paper builds that estimate from its parts, tests it and compares it with the 15% hurdle. Haverstock and every input are composites written for teaching.
What the Rate Represents
A company raises money from lenders and owners, and each expects a return that compensates for time and risk. The cost of capital is the blend of those expected returns, weighted by how much of each kind of money the company uses. A project of ordinary risk for the business that earns more than this blend adds value; one that earns less takes value away, even if it shows an accounting profit.
The Cost of Debt
Haverstock's lenders now require about 7.75% a year, the yield at which the seven-year note in Module 3 would sell. The coupon on the company's older equipment loan, 5.1%, is not relevant, because it reflects rates when that loan was made. Interest is deductible, and at a combined federal and Indiana rate of 25%, the after-tax cost is 7.75% × (1 minus 0.25), or about 5.81%.
The Cost of Equity
Graham and Harvey (2001) asked 392 finance chiefs how they estimate the return their shareholders require. Far more of them named the capital asset pricing model than any rival method, with historical average returns and dividend models well behind. Many respondents also said they would apply the company-wide rate even to a project whose risk differed from the firm's. This paper uses the model, with two adjustments a private company needs.
First, beta. Haverstock's shares do not trade, so beta comes from three public peers whose betas average 1.25 at an average debt-to-equity ratio of 0.35. Part of a peer's beta comes from its borrowing, so the peers' average is converted to an asset beta that reflects business risk only: 1.25 / (1 + 0.75 × 0.35) = about 0.99. That asset beta is then adjusted for Haverstock's own borrowing, $6 million of debt against $13.1 million of equity, a ratio of 0.46: 0.99 × (1 + 0.75 × 0.46) = about 1.33.
Second, size and private ownership. Small private companies are harder to sell and depend on a few customers and managers, and appraisers commonly add a premium for that. This analysis adds 3 percentage points.
| Input | Value | Source |
|---|---|---|
| Risk-free rate | 4.3% | Twenty-year Treasury yield |
| Relevered beta | 1.33 | Three public peers, adjusted for Haverstock's borrowing |
| Market risk premium | 5.5% | Middle of commonly used estimates |
| Model estimate | 4.3% + 1.33 × 5.5% = 11.6% | |
| Size and private-company premium | 3.0% | Appraisal practice for firms of this size |
| Cost of equity | about 14.6% |
Weights and the Blend
Weights use market or appraised values, because the return investors require applies to what their claims are worth today. Equity is valued at about $13.1 million from Module 3 and debt at about $6 million, giving weights of 68.6% and 31.4%.
| Component | Weight | Cost after tax | Contribution |
|---|---|---|---|
| Equity | 68.6% | 14.6% | 10.02% |
| Debt | 31.4% | 5.81% | 1.82% |
| Weighted cost of capital | 100% | about 11.8% |
How Precise Is 11.8%?
Fama and French (1997) estimated the cost of equity for dozens of industries using both the capital asset pricing model and a three-factor model and found that the estimates were strikingly imprecise. Standard errors of more than three percentage points a year were common, because risk loadings shift over time and because the premiums themselves are uncertain. A cost of capital stated to the decimal point suggests far more confidence than the inputs support. For Haverstock, varying the inputs over plausible ranges gives the following.
| Change in input | Cost of equity | Weighted cost of capital |
|---|---|---|
| Base case | 14.6% | 11.8% |
| Size premium 2% instead of 3% | 13.6% | 11.2% |
| Size premium 4% | 15.6% | 12.5% |
| Market risk premium 5% | 14.0% | 11.4% |
| Market risk premium 6% | 15.3% | 12.3% |
| Beta from the lowest and highest peer, relevered | 13.7% to 15.5% | 11.3% to 12.5% |
Where the 15% Hurdle Might Come From
Jagannathan et al. (2016) examined survey responses from chief financial officers on both their cost of capital and the hurdle rates they actually apply. Hurdle rates were well above the companies' own estimates of their cost of capital, on average by several percentage points. The gap was not mainly explained by difficulty raising money. It was linked to limits on managerial time and operating capacity: firms that could not manage every worthwhile project at once set high hurdles to ration their attention, passing up projects that would have added value on paper.
That account fits Haverstock. The plant has one engineering manager and one maintenance lead, and both were stretched during last year's press brake failure. A high hurdle protects them from a backlog of projects. But the hurdle also has a cost: a project earning 13%, above the 11.8% cost of capital but below 15%, would add value and still be rejected.
Recommendation
Haverstock should evaluate projects at its cost of capital, about 11.8% for projects of average risk, and use a higher rate only when a project is riskier than the business. Where capacity is the real limit, the owners should say so directly and rank projects by net present value per hour of management time, instead of letting a high hurdle quietly do the rationing. Module 7 will evaluate the laser cell at 11.8% and show the result at 15% as well, so the board can see what the hurdle would cost.
Conclusion
Haverstock's cost of capital, built from a 5.81% after-tax cost of debt and a 14.6% cost of equity weighted by market values, is about 11.8%, within a range of roughly 11% to 13%. Graham and Harvey show the methods are standard practice, Fama and French show why the answer should be stated as a range and Jagannathan and colleagues explain why the owners' 15% hurdle exists and what it gives up.
References
Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153-193. https://doi.org/10.1016/S0304-405X(96)00896-3
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
Jagannathan, R., Matsa, D. A., Meier, I., & Tarhan, V. (2016). Why do firms use high discount rates? Journal of Financial Economics, 120(3), 445-463. https://doi.org/10.1016/j.jfineco.2016.01.012
What the MAT 444 Module 5 instructions ask for
Cost of capital is the topic of MAT 444's fifth module, where the paper generally asks for a weighted average cost of capital for a real or described firm, with each component justified. Where your Aspen classroom prompt for Module 5 differs, follow it; Haverstock and the market inputs are composites. Work out what new borrowing would cost once interest is deducted. Estimate the cost of equity, explaining the model and every input, including how beta was found for a firm without traded shares. Weight the components by market values. Test how much the answer moves when the inputs change. Compare the result with any hurdle rate the company uses and explain the difference, with sources cited in APA 7 form.
Inside the MAT 444 Module 5 example
The pre-tax cost of debt, 7.75%, comes from the yield on the private placement priced in Module 3, and a 25% combined tax rate leaves 5.81% after tax. Three listed peers carry an average beta of 1.25 while borrowing 35 cents per dollar of equity; removing their debt gives an asset beta near 0.99, and adding back Haverstock's own ratio of 0.46 gives 1.33. A 4.3% risk-free rate, a 5.5% market premium and a 3-point premium for size and private ownership put the cost of equity at about 14.6%. Market-value weights of 68.6% equity, based on the $13.1 million value from Module 3, and 31.4% debt, based on $6 million of borrowing, produce about 11.8%. Graham and Harvey (Journal of Financial Economics), Fama and French (Journal of Financial Economics) and Jagannathan and coauthors (Journal of Financial Economics) explain practice, precision and the hurdle gap.
Reading the MAT 444 Module 5 grading rubric
Cost of capital papers are marked on whether each component is estimated with defensible inputs and whether the weights use market values. This example takes the debt cost from a current yield instead of an old coupon, adjusts for taxes, and walks through unlevering and relevering a peer beta, the step most often skipped for a private firm. It adds a stated size and private-company premium instead of hiding it inside beta. The weights use the Module 3 equity value. Fama and French justify the sensitivity range, and Jagannathan and colleagues give the owners' 15% hurdle a fair hearing rather than calling it wrong. The paper ends with a rate to use in Module 7 and the reasoning for it.
MAT 444 Module 5 help: mistakes that cost marks
Weighted cost of capital papers often use book values for the weights, which usually understates equity; use market or appraised values. A frequent error is applying the coupon rate on old debt as the cost of debt; use what lenders would charge today. Students also take a peer's beta without adjusting for differences in borrowing, so unlever and relever it. Do not forget the tax deduction on interest. Present the cost of equity as a range, since every input is an estimate. Finally, if the firm uses a hurdle rate above its cost of capital, explain why that might be sensible, and what it costs, instead of simply declaring it a mistake.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Aspen University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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MAT 444 Module 5 questions, answered
What does MAT 444 Module 5 usually ask for?
Aspen's MAT 444 covers cost of capital in this module, so estimating a weighted average cost of capital with each component justified is typical. Read the classroom prompt for the required firm and format.
How do I find beta for a private company?
Take betas of similar public firms, remove the effect of their borrowing to get an asset beta, then add back the private firm's own debt-to-equity ratio.
Why use market values instead of book values for the weights?
Investors' required returns apply to what their claims are worth now, and book equity often understates that value by a wide margin.
Where can I find a free MAT 444 Module 5 sample paper?
The cost of capital paper above is free and complete: an invented private fabricator's rate built from debt and equity costs, with a relevered beta and a range.
Why do companies use hurdle rates above their cost of capital?
Jagannathan and colleagues linked high hurdles mainly to limited managerial and operating capacity, which makes firms ration projects.