Chapter_10overview.ppt

Chapter_10overview.ppt - Chapter 10 Overview Cost of...

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Chapter 10
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Overview Cost of Capital Companies raise capital by issuing stocks and bonds Capital is a cost factor of production just like many other costs such as cost of materials. The cost of capital is the same as the required rate of return from the investors point of view.
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Overview cost of capital Recall that the primary goal of any firm is to maximize shareholder value Firms must earn more than the cost of capital to maximize shareholder value For this reason the cost of capital is referred to as the “hurdle rate” For a project to be accepted it must earn more than the hurdle rate
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Overview Cost of capital Cost of capital is primarily used for capital budgeting (means choosing the project with the highest return after taking risk into consideration). It is also the hurdle rate --- the project must make more than the cost of capital. Also used to calculate EVA – recall EVA formula. EVA = NOPAT – after tax cost of operating capital
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Capital components
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This note was uploaded on 09/08/2010 for the course BUS 170 at San Jose State University .

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Chapter_10overview.ppt - Chapter 10 Overview Cost of...

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