Economic analysis

The federal government imposes requirements upon industry in many areas, such as employee safety, pollution control, environmental protection, and noise control. One view of these regulations is that their compliance tends to decrease the return on investment and/or increase the cost of capital to the corporation. In many cases the economics of these regulated compliances cannot be evaluated as regular engineering economy alternatives.

Use your knowledge of engineering economic analysis to explain how an engineer might economically evaluate alternatives that define the ways in which the company will comply with imposed regulations.

 

Common stocks issued by Henry Harmon Builders paid stockholders $0.93 per share on an average price of $18.80 last year. The company expects to grow the dividend rate at a maximum of 1.5% per year. The stock volatility of 1.19 is somewhat higher than that of other public firms in the construction industry, and other stocks in this market are paying an average of 4.95% per year dividend. U.S. Treasury bills are returning 4.5%.

Determine the company’s cost of equity capital last year, using (a) the dividend method and (b) the CAPM.

Solution:

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