08%20cost%20of%20capital

08%20cost%20of%20capital - of capital 1 FNAN 301 Financial...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
of capital - 1 FNAN 301 Financial Management Cost of capital
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
of capital - 2 Topics Covered Firm cost of capital Overview Important relationships Weighted-average cost of capital Computing Two capital structure items (1 debt and 1 equity) Any number of capital structure items Using, relevance, and importance Project cost of capital
Background image of page 2
of capital - 3 Cost of Capital: Overview Patriot Theaters owns and operates 145 movie theaters in the Mid-Atlantic Region The firm’s managers think that expanding into New England may be a good move for the company The managers need to conduct capital budgeting analysis to help them decide whether or not to expand A critical part of that analysis is determining the appropriate cost of capital associated with the expansion project It is the rate used to discount expected cash flows when computing the project’s NPV and is determined by the risk of the project
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
of capital - 4 FNAN 301 Notes We will cover cost of capital within the context of evaluating a project Cost of capital is relevant for many important aspects of financial analysis such as valuing a company and valuing a part of a company like a division or department This analysis and associated issues are covered in other finance courses such as FNAN 302 and FNAN 401
Background image of page 4
of capital - 5 FNAN 301 Notes Cost of capital will be expressed as an annual rate The cost of capital material is relevant for costs of capital expressed for any period if certain adjustments are made, but using annualized costs of capital enables us to simplify and focus our work In this section, stocks pay annual dividends and bonds pay annual coupons so everything is in comparable terms Not necessary, as rates can be annualized
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
of capital - 6 Cost of Capital: Overview The cost of capital for a project is the expected return investors could earn on securities that have the same level of risk as the project The cost of capital is also called the opportunity cost of capital Pursuing a project with a certain level of risk means forgoing the opportunity to invest in securities with that level of risk and earn the associated expected return Question: how can financial managers determine the appropriate cost of capital for a project? We will cover some answers to this question
Background image of page 6
of capital - 7 Firm Cost of Capital: Capital Structure A firm’s capital structure is the firm’s mix of debt and equity It reflects the holdings of the investor groups that have provided the firm with the funds to acquire, develop, and maintain its assets and therefore have claims on the cash flows produced by the firm’s assets Many types of debt and equity are used by firms Main ones for large corporations are bonds and common stock Bank loans are also used often Preferred stock is used to a lesser extent
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
of capital - 8 Firm Cost of Capital: Relationships In cost of capital analysis, we make the common
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 57

08%20cost%20of%20capital - of capital 1 FNAN 301 Financial...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online