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Day 12 - value of a firm you have to understand the...

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* Day 12: Part 2 Agenda * Final Exam Review Thursday— Email Topics by Wednesday at  1:00 * Chapter 9: Cost of Capita * 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 the  costs  of financial capital  to the firm.   In general, the returns a firm earns must be  high enough to cover the cost of capital in  order to avoid destroying shareholder  value.    * Mind Map Learning Objectives: * Articulate the relationship between  the  cost of funds  and  return
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* Describe how a firm can  increase  value * Calculate the weighted average cost  of capital (WACC) * Discuss when the WACC is an  appropriate discount rate for  potential investment projects * Mind Map Key Words/Concepts: * Cost of Capital/WACC * Component Costs * Tax Shield * Appropriate Use of WACC   In order to determine whether a  capital investment will increase the 
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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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