Cost of capital - handout

Cost of capital - handout - The Cost of Capital Mind Map...

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The Cost of Capital
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Mind Map Why?: An important question is “how high does our return have to be in order to justify an investment in the project?” In this topic area, we consider what financial capital costs the firm. In general, a firm must earn returns high enough to cover the cost of capital in order to avoid destroying shareholder value
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Mind Map Learning objective: Articulate the relationship between the cost of funds and return Describe how a firm can increase value Calculate the weighed average cost of capital (WACC) Discuss when the WACC is an appropriate discount rate for potential investment projects
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Mind Map Key words/concepts: Cost of capital/ WACC Component costs Tax shield Appropriate use of WACC
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In order to determine whether a capital investment will increase the value of a firm, you have to understand the opportunity cost of the capital. Basically: ROA > C of C increase value ROA< C of C decrease value The Cost of Capital
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capital? Debt Preferred Stock Equity Each of these offers a rate of return to investors. This return is a cost to the firm. Cost of capital ” refers to the weighted average cost of capital (WACC)- a weighted average cost of financing sources.
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Cost of capital - handout - The Cost of Capital Mind Map...

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