Understanding the Cost of Capital in Corporate Finance Analysis

Jan 04, 2025

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Explore the fundamental concepts of cost of capital in corporate finance, covering time value of money, financial statements, stocks, bonds, risk and return, and capital budgeting decisions. Gain insights on assets, liabilities, and their impact on investment strategies.

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Understanding the Cost of Capital in Corporate Finance Analysis

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Presentation Transcript

Chapter 16 – Cost of Capital

Chapter 16 – Cost of Capital Capital definition : Mix of long-term financing sources, primarily debt and equity, used by the company Opportunity Cost Concept Cost of capital is an opportunity cost

524 views • 18 slides

Chapter 9: The Cost of Capital

Chapter 9: The Cost of Capital. The Cost of Capital:. Chapter Outline:. The Purpose of the Cost of Capital Capital Components Calculating Component Costs of Capital Calculating the WACC Factors that affect the cost of capital Problem areas in cost of capital.

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CHAPTER 9 The Cost of Capital

CHAPTER 9 The Cost of Capital. Cost of Capital Components Debt Preferred Common Equity WACC. What types of long-term capital do firms use?. Long-term debt Preferred stock Common equity. Capital components are sources of funding that come from investors.

1.06k views • 55 slides

The Cost of Capital (Chapter 15)

The Cost of Capital (Chapter 15). OVU- ADVANCE Managerial Finance D.B. Hamm, rev. Jan 2006. “Cost of Capital?”. When we say a firm has a “cost of capital” of, for example, 12%, we are saying: The firm can only have a positive NPV on a project if return exceeds 12%

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Chapter 12 - Cost of Capital

Chapter 12 - Cost of Capital. Where we’ve been. Basic Skills: (Time value of money, Financial Statements) Investments: (Stocks, Bonds, Risk and Return) Corporate Finance: (The Investment Decision - Capital Budgeting). The investment decision.

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CHAPTER 10 The Cost of Capital

CHAPTER 10 The Cost of Capital. Sources of capital Component costs WACC Adjusting for flotation costs Adjusting for risk. What sources of long-term capital do firms use?. Calculating the weighted average cost of capital. WACC = w d r d (1-T) + w p r p + w c r s

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COST OF CAPITAL CHAPTER 10

COST OF CAPITAL CHAPTER 10. Weighted Average Cost of Capital Cost of Capital Components. Types of Capital. SOURCES OF LONG-TERM CAPITAL . From Most to Least Used Sources Retained Earnings Sale of Corporate Bonds Sale of Common Stock Sale of Preferred Stock

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Chapter 16 – Cost of Capital

Chapter 16 – Cost of Capital. Capital definition : Mix of long-term financing sources, primarily debt and equity, used by the company. Opportunity Cost Concept. Cost of capital is an opportunity cost

493 views • 18 slides

Chapter 13 Cost of Capital

Chapter 13 Cost of Capital. Capital Structure. A firm’s Capital Structure its mix of the three components of long term funding Debt Preferred stock Equity Target Capital Structure Raising Money in the Proportions of the Capital Structure. The Purpose of the Cost of Capital.

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Cost of Capital (chapter 10)

Cost of Capital (chapter 10). What sources of capital do firms use?. Stockholders focus on A-T CFs. Therefore, we should focus on A-T capital costs, i.e. use A-T costs of capital in WACC. Only r d needs adjustment, because interest is tax deductible.

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Chapter 14 Cost of Capital

Chapter 14 Cost of Capital. 14.2 Estimating the Weights. 14.3 Estimating the Costs of Capital. 14.4 Assembling the Pieces. 14.1 The Marginal Cost of Capital Schedule. Chapter 14 Outline. Step 1: Calculate the proportions of capital Step 2: Estimate the costs of capital

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CHAPTER 11 The Cost of Capital

CHAPTER 11 The Cost of Capital. Sources of capital Component costs WACC. Cost of Capital . The cost of capital represents the overall cost of financing to the firm

1.42k views • 31 slides

Chapter 10 – The Cost of Capital

Chapter 10 – The Cost of Capital. Learning Objectives Calculate a WACC Explain why WACC is adjusted for debt Calculate weights with book and market value Understand how WACC is used in capital budgeting decisions Determine the Beta of a Project Select optimal project set.

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Chapter 10 Cost of Capital

Chapter 10 Cost of Capital. Liabilities & Equity Assets Debt Preferred Stock $ Bank 14% Common Stock 5% R.O.I. (cost of $) Total Liabilities = Total Assets & Equity.

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CHAPTER 10 The Cost of Capital

CHAPTER 10 The Cost of Capital. Sources of capital Component costs WACC. What sources of long-term capital do firms use?. Calculating the weighted average cost of capital. WACC = w d r d (1-T) + w p r p + w c r s The w’s refer to the firm’s capital structure weights.

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Chapter 9 - Cost of Capital

Chapter 9 - Cost of Capital. Where we’ve been. Basic Skills: (Time value of money, Financial Statements) Investments: (Stocks, Bonds, Risk and Return) Corporate Finance: (The Investment Decision - Capital Budgeting). Assets Liabilities & Equity

682 views • 47 slides

Chapter 12: Cost of Capital

Chapter 12: Cost of Capital. Key Concepts and Skills. Know how to determine a firm ’ s cost of equity capital Know how to determine a firm ’ s cost of debt Know how to determine a firm ’ s overall cost of capital Understand pitfalls of overall cost of capital and how to manage them.

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Chapter 11 The Cost of Capital

Chapter 11 The Cost of Capital. Learning Goals. Understand the key assumptions that underlie cost of capital, the basic concept of cost of capital, and the specific sources of capital that it includes. Determine the cost of long-term debt and the cost of preferred stock.

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CHAPTER 10 The Cost of Capital

CHAPTER 10 The Cost of Capital. Sources of capital Component costs WACC Adjusting for flotation costs. What sources of long-term capital do firms use?. Calculating the weighted average cost of capital. WACC = w d r d (1-T) + w p r p + w c r s

540 views • 31 slides

Chapter 11 - Cost of Capital

Chapter 11 - Cost of Capital. Concept of the Cost of Capital Computing a Firm’s Cost of Capital Cost of Individual Sources of Capital Optimal Capital Structure Marginal Cost of Capital Combining the MCC and IOS. Concept of the Cost of Capital.

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CHAPTER The Cost of Capital

CHAPTER The Cost of Capital. Sources of capital Component costs WACC. Cost of Capital. The items on the financing side of the balance sheet are called capital components. The major capital components are equity, preference and debt.

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