FIN301CHAPTER12(2)

FIN301CHAPTER12(2) - 1-112 NC-10 CH. 12: Weighted Average...

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Unformatted text preview: 1-112 NC-10 CH. 12: Weighted Average Cost of Capital & Cost of CapitalKnow how to determine a firms cost of equity capitalKnow how to determine a firms cost of debt capital (on an after-tax basis)Know how to determine a firms cost of preferred capitalKnow how to determine a firms overall cost of capitalattaching market value weights to each of the above component costs1-212 NC-2Weighted Average Cost of Capital/WACCBy getting to the WACC we will know the overall cost of capital for the firm as a wholeThis will reflect the after-tax cost of all forms of capital: equity, preferred (if used), and debtWACC will also reflect the risk profile of all of the usesof capital for the firm as a wholeThats because each of the component costs of capital (equity, debt, and preferred) reflect the risk profile of all of the uses of capital for the firm as a wholeWACC is the entire firmsrequired rate of return21-312 NC-3Cost of Capital/COC for a proposed investment different than WACCThe Cost of Capital/COC for a given project being considered depends on the particular risk level of that potential use of fundsIf a project is part of the core day-to-day business of a corporation you go ahead and use the firms Weighted Average Cost of Capital/WACC or required return/RR as the projects Cost of CapitalHere the proposed projects risk level mirrors that of the firm as a whole31-412 NC-4Cost of Capital Versus Weighted Average Cost of CapitalIf a project isnt part and parcel of the Firms core then use WACC/RR for a Company whose core business isthe same as that of the projectIf Wal-Mart is thinking about opening a wholesale club, it would do well to use Costcos WACCThis is called the pure play method...
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FIN301CHAPTER12(2) - 1-112 NC-10 CH. 12: Weighted Average...

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