FI.Chapter10 - Fto 't.: Chapter 10 The Cost of Capital 340...

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Fto 't.: Chapter 10 Chapter 11 Chapter 12 Chapter 13 The Cost of Capital 340 Tlle Basics of Capital Budgeting: Evaluafing Cash Flows 377 Cash Flow Estimation and Risk Analysis 415 Real Options 457
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'g,, 76 c: : i:* '*'.;=,, ;f ilag:ci*E cncral Elccilic lus long been rccog nized as one of the r,orld's best- managed conpanies, and it hits rc$?rded its shar€holders with outstandint rct rns. During iis corporate life, CE has faised a cumulativc St09 billion nl capital tfrnn its stockholdcrs, b t ii llas turnecl that 5109 billion into stock worth more thrrl 53,16 billion. Its Markei Value Adcled (MVA), r,hich is the difference betu'ecn its stock's markei capiialization and thc ilmouni shareholclcrs oriBinally put rp, is a whopping $237 billi()l1l Not surprishgL, CE is always at or neirr Lhe top of all colnpn- \/hen invesh)rs provide a corporation $ith funds, thev orprct ihe company k) gen€rate an appropriate rcturn on ihat cap- iLrl. From the conpanv's perspectivc, thc ir1\,csbrs' expecteLl rcllrrn is a cost of rrsing thc capital, and it is called the "cosL of capital." A Yarictv of factors influence a firln's cost of capital. Some, such as thc lc\€l oi interest rates, state and fedc.al t.rx policics, an.t the rcgulatorv environIncnt, arc outsidc thc firln's control. IIowevcr, both the degrcc of risk il1 the pfojects ii undertakes and thc Lvpcs of funds it rniscs arc uncler the compnny's conirol, and both havc n profound cffcct orr its cost of capital. (l['s ovcrall cost of cnpitat (the r{eightcd nverage cost of its deLri and cqrity) has bcon estimaied to be about 8%. Thercforo, k) satisfy its invcsk)rs, CE mlrst gcrcrate a nrrfl on nr '\c. .r$L projL,r ,.f.rl lr.r-l b conr. of CF . fn'jecr- J'e 1,,'n,f tr,'\ n in tLre { r.e rtr. t rhc. ornp"nv hd- d"!,.1.,p,,.1 | reh fro.lu. ' .'r Inr\'ri d r n'h ga,';r.rpl i market. For c\amp]e, CE's applianc€ ,l \i,ion inrrodL.rL, (l-e Ad\JrLiLrr -f,,.1 .uolirrg rrLrr . rJ the ultr.r qL|lL I Tfll, ' d, \\.,-1,!r. rnri Ll beg"r. Ie'.,rr p' l!. .- bonaie pnxluciion at a ncur plastics planl Itl Cartagena, Spnin. Sonetines CII cr€ates completelv ner' lines of busincss, as rvh€n it began provicling e commerce scrviccr. Wher (,1. r !.,hr,.1, . f^lFnrr. I fn.j, . , . . r1, as these, il nl st determine whether the return on the capiial jt musi invcsi in tI€ projc.r Nill e'(feLl lhe.oir,'lth.r,,rp|l.1l. CF Jl-' ir\f.t- b\ d,qurflnq,,rh,' . .1- panies. Since 2002, GE has spent over $65 billion to acquirc hundreds of comp.uli-"s, such as lts acquisition of Evcrest Vl'f, a com pJr\ -p.1 :rli/irq irr rernol. \ i.Lr.rl in-f,. iion technolo8v. Aeain, GE must csiimate ll,p e\p<r.d r.rurn
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This note was uploaded on 06/08/2009 for the course FI 601-602 FI601-602 taught by Professor Prof.geary during the Spring '09 term at New Haven.

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FI.Chapter10 - Fto 't.: Chapter 10 The Cost of Capital 340...

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