Cost of Capital

Cost of Capital - FINA 4310 Cost of Capital Cost of Capital...

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1 FINA 4310 Cost of Capital Cost of Capital The minimum return on the firm’s assets • The minimum return on the firm s assets that will satisfy the required return for all of the firm’s investors. • The cost of capital is a weighted average. • Weights should be market value weights. • Weights should reflect the long run view of target capital structure.
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2 Target Capital Structure • The long term capital structure target for the firm. • The capital structure believed to be the one that maximizes firm value. • In the short term, capital structure may vary from the target, depending on current financing sources. • If the actual capital structure deviates too far from the target, firm must make corrections. • In evaluating projects, the target capital structure is assumed. Two Uses of Cost of Capital Establish the value of the firm • Establish the value of the firm. • Used as a hurdle rate in evaluating projects.
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3 Cost of Capital and Firm Value A K funds of suppliers to Payments Value Firm = Weighted Average Cost of Capital vs. Asset Specific Financing WACCbasedonthefirm’s target capital
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Cost of Capital - FINA 4310 Cost of Capital Cost of Capital...

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