LEC4.docx - LEC4 The cost of capital Companies have no real way to estimate the discount rate that reflects the risk of a particular project Estimate

LEC4.docx - LEC4 The cost of capital Companies have no real...

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LEC4: The cost of capital Companies have no real way to estimate the discount rate that reflects the risk of a particular project Estimate cost of capital for the entire company - Calculate weighted average cost of capital Accounting balance sheet – book value e.g. of assets (WE DO NOT USE BOOK VALUE IN THIS COURSE) - Value of claims that investors hold (liability and equity) must equal to the value of the cash flows (value of debt and equity is determined by its cash flows) Finance balance sheet – market value e.g. of assets - Market value of debt and equity is the function of the cash flows that debt and equity generate - The people who lend money to company’s and the investors have the right to receive all the company’s cash flow the company generates in the future - Assets generate cash flow; liability holders have the right to receive cash flows and anything left over goes to equity holders MV of liabilities – right to receive all cash flows
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  • Spring '17
  • VALDEZ

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