Chapter 15

Chapter 15 - BA 3341 Business Finance Nataliya...

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1 BA 3341 Business Finance Nataliya Polkovnichenko, Senior Lecturer
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2 • Calculate a firm’s capital structure • Determine the required rates of returns on the securities issued by the firm • Calculate the weighted-average cost of capital ( i.e. use WACC formula) • Understand when the WACC is-or isn’t- the appropriate discount rate for a new project
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3 What discount rate should be used to evaluate projects that have the same risk as the company’s existing assets and operations? Company Cost of Capital – expected rate of return demanded by investors in the company. Determined by the risk of the company’s existing assets and operations.
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4 100 % common stock firm Common Stock Expected Return Company Cost of Capital Risk of the firm’s (real) assets = Risk of firm’s stock.
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5 firm Common Stock Expected Return Company Cost of Capital Equity Debt What do we do? In general, most firms have long-term debt (bonds) in addition to equity capital.
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Use weighted-average cost of capital (WACC) - expected rate of return on a portfolio of all the firm's securities. WACC
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Chapter 15 - BA 3341 Business Finance Nataliya...

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