22/09/2010
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FINS1613 BUSINESS FINANCE
Week 9
Co-Lecturer: Donald Winchester (Weeks 9, 10 and 11)
Email: [email protected]
Consultation Days/Times
–
(room Quad 2117):
Tuesday:
3 pm to 4 pm
Wednesday:
5 pm to 6 pm
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House Keeping
Final Exam = 60 multiple choice questions (of equal value)
20 MC questions come from chapters 12, 15, 13, and 14.
Quiz 3 held in week 10 during normal tutorial time.
Quiz 3 worth 10 marks
–
up to 5 marks come from today's lecture
and/or week 10 tutorial questions based on textbook chapters 12
and 15. Remainder of marks set by co-lecturer.
Quiz 4 held in week 12 during normal tutorial time.
Quiz 4 marks split between chapters 13 and 14 most likely
multiple choice questions (7-10) with question marks clearly
labelled (probably of equal value).
Quiz questions may be on lecture notes not in the textbook
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Cost of Capital (Chapter 12): Key Concepts and Skills
Know how to determine a firm’s cost of equity
capital
Know how to determine a firm’s cost of debt
Know how to determine a firm’s overall cost
of capital
Understand pitfalls of overall cost of capital
and how to manage them
Understand the impact of an imputation tax
system (cf. classical system)
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Chapter Outline
The Cost of Capital: Some Preliminaries
The Cost of Equity
The Costs of Debt and Preferred Stock
The Weighted Average Cost of Capital
Divisional and Project Costs of Capital
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Why Cost of Capital is Important
We know that the return earned on assets
depends on the risk of those assets
The return to an investor is the same as the
cost to the company
Our cost of capital provides us with an
indication of how the market views the risk of
our assets
Knowing our cost of capital can also help us
determine our required return for capital
budgeting projects
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Required Return
The required return is the same as the appropriate
discount rate and is based on the risk of the cash
flows
We need to know the required return for an
investment before we can compute the NPV and
make a decision about whether or not to take the
investment
We need to earn at least the required return to
compensate our investors for the financing they
have provided
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