09 Cost of capital - handout

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

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Unformatted text preview: The Cost of Capital 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 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 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 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 How can the firm raise capital? • Debt • Preferred Stock • Equity • Each of these offers a rate of return to investors....
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This note was uploaded on 02/17/2012 for the course FINANCE 301 taught by Professor Jimbrau during the Winter '12 term at BYU.

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

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