6. New Cost of Capital

6. New Cost of Capital - 1 Click to edit Master subtitle...

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

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 Click to edit Master subtitle style School of Business Administration University of Miami Cost of Capital Corporate Financial Management Replaces slides 36 to end for Advanced Capital 22 Assigned Readings & Problems  Read Chapters 8 and 16  In Chapter 8 do: Questions/Challenging Questions: 2, 3, 4, 9, 10, 12 Problems: A6, A7, A8, A9, B7, B10, B11, B12, C1, C3  In Chapter 16 do: Questions/Challenging Questions: 6, 7 Problems: A3, A4, A9, B3, B4 (assume cost of equity is 21.6%), B7, B9, C2  In Chapter 17 do: Problems: A4, A6, A7, B5, B6, B9, B12, C1 SEE END OF THE LECTURE NOTES FOR ADDITIONAL ASSIGNED PROBLEMS! Replaces slides 36 to end for Advanced Capital 33 Learning Objectives  Decompose the cost of equity capital into business risk and financial risk  Estimate the weighted average cost of capital (WACC) of a firm  Develop the relationship between the WACC of a Firm and the Firms Capital Structure  Differentiate between the WACC of a firm and the WACC of one project funded by that firm  Estimate a projects WACC (adjusted for the Firms Capital Structure) Replaces slides 36 to end for Advanced Capital 44 A Firms Cost of Capital Replaces slides 36 to end for Advanced Capital 55 Cost of Capital  The Cost of Capital is the return required by the provider of that capital  It is the opportunity cost of funds that the investor has tied up in the firm  It is the rate of return at which investors are willing to provide financing Replaces slides 36 to end for Advanced Capital 66 Required Return and Risk  The required return for a firm depends on its Business Risk  The required return for a firms equityholders depends on both Business Risk Financial risk (resulting from financial leverage) Replaces slides 36 to end for Advanced Capital 77 Business Risk  What determines business risk? Demand and Sales Price Variability Input Cost Variability Ability to Develop New ProductsInnovate Foreign, political, and exchange rate risk exposure Operating Leverage Replaces slides 36 to end for Advanced Capital 88 Operating Leverage  What is Operating Leverage? It is the mix/trade-off of fixed versus variable costs of production  High fixed costs (and correspondingly lower variable costs per unit) results in high operating leverage The firms profits are MORE sensitive to changes in sales  Conversely, low fixed costs (and correspondingly higher variable costs per unit) results in low operating leverage The firms profits are LESS sensitive to changes in sales Replaces slides 36 to end for Advanced Capital...
View Full Document

Page1 / 90

6. New Cost of Capital - 1 Click to edit Master subtitle...

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