Chapter 10 w Learning Obj

Chapter 10 w Learning Obj - Chapter 10 The Cost of Capital...

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    10-1 Chapter 10 - The Cost of Capital Learning Objectives After reading this chapter, students should be able to: Explain what is meant by a firm’s weighted average cost of capital. Define and calculate the component costs of debt and preferred stock. Explain why the cost  of debt is tax adjusted and the cost of preferred is not. Explain why retained earnings are not free and use three approaches to estimate the  component cost of retained earnings. Briefly explain the two alternative approaches that can be used to account for flotation  costs. Briefly explain why the cost of new common equity is higher than the cost of retained  earnings, calculate the cost of new common equity, and calculate the retained earnings  breakpoint—which is the point where new common equity would have to be issued. Calculate the firm’s composite, or weighted average, cost of capital. Identify some of the factors that affect the WACC—dividing them into factors the firm  cannot control and those they can. Briefly explain how firms should evaluate projects with different risks, and the problems  encountered when divisions within the same firm all use the firm’s composite WACC when  considering capital budgeting projects. List some problems with cost of capital estimates.
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    10-2 CHAPTER 10 The Cost of Capital Sources of capital Component costs WACC Adjusting for flotation costs Adjusting for risk
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    10-3 What sources of long-term  capital do firms use? Long-Term Capital Long-Term Debt Preferred Stock Common Stock Retained Earnings New Common Stock
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    10-4 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. The r’s refer to the cost of each  component.
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    10-5 Should our analysis focus on  before-tax or after-tax capital costs? Stockholders focus on A-T CFs.  
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This note was uploaded on 07/18/2009 for the course FIN 3331 taught by Professor Nowacki during the Spring '09 term at Troy.

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Chapter 10 w Learning Obj - Chapter 10 The Cost of Capital...

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