Adjustment to discount rate (ADR) adjusts a projects discount rate for flotation costs
and not the projects cash flows.
Each component cost of capital is recalculated by finding discount rate that equates
present value of cash flows to suppliers of capita
Better stories and better constructs: The case for rigor and
Academy of Management. The Academy of Management Review; Jul 1991; 16, 3; ProQuest Central
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If HR wants to play a strategic role in organizations, it needs to develop its ability to
measure how human capital decisions affect the business and how business
decisions affect human capital.
HR often falls
Total risk of the firm is what is most important. Investment decisions made in light of
their marginal effect on total risk.
Management wants to give best combination of projects, with the least amount of
overall risk and best case of solvency for the fir
Required Return with Leverage:
if debt financing is used we need to determine a weighted average required rate of
A 5 or 6 digit code is assigned to each company.
Take median of the companies.
Beta should broadly portray industry.
Same as model us
If positive shareholder value is being created.
EVA differs from accounting profit in that it includes a charge for all the companys
capital, debt and equity.
The CAPM: Project Specific and Group Specific Required Rates of Return
- used when risk is not c
Probability Distribution Approach:
do not initially adjust for risk, but rather study it.
The critical factor from the standpoint of stock valuation is how accurately management
is able to link share price with risk return info for an investment proposal.
Assumes there is an optimal capital structure:
the capital structure that minimizes the firms cost of capital and thereby maximizes the
value of the firm.
Approach suggests the firm can initially lower its cost of capital and raise its total value
Net Operating Income Approach:
a theory of capital structure in which the weighted average cost of capital and the total
value of the firm remain constant as financial leverage is changed.
This approach implies:
that that the total valuation of the firm i
Debt funds can change depending on the firm.
when determining weighted average required return for a group:
most companies use overall after tax borrowing cost as the cost of debt component.
Therefore, few companies have used CAPM to group debt costs like
(See information in Question #7 above.)
The "cost" of this asset that, by law, may be
written off over time "for tax purposes" is closest to
475,000 + 5,000 = $480, 000
Under U.S. tax law, the assets depreciable basis is NOT reduced by
Weighted Average Cost of Capital:
firms overall cost of capital can be the sum of kx(Wx) where kx is the after tax cost of
the xth method of financing
Wx is the weight given to that method of financing as a % of the firms total financing,
and the sum of f
Building Theories From Case Study Research
Eisenhardt, Kathleen M
Academy of Management. The Academy of Management Review; Oct 1989; 14, 4; ProQuest Central
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