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Unformatted text preview: value of a firm, you have to understand the opportunity cost of the capital. Cost of Capital Comparison : If ROA > C of C INCREASE value If ROA < C of C DECREASE value For Investors: the rate of return on an asset is the benefit of investing. For Financial Managers: that same rate of return is a cost of raising funds that are needed to operate the firm. For You (the Stockholder): the increase in firm value comes from the difference in the cost of capital and the rate of return earned by the firm. 1) Debt [ex. Bonds, ST or LT Bank Loans] 2) Preferred Stock [ex. Hybrid Debt & Equity] 3) Equity [ex. Common Stock]-Each source offers a rate of return to investors .-This rate of return is a cost to the firm ....
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- Summer '11
- Finance, weighted average cost, appropriate discount rate