Chapter 9,10 Debt and stock
valuation
Overview of corporate debt
The corporation can borrow the capital from the
bankers (private debt short term) or from issuing the
bond (public debt long term)
Smaller firms raise debt capital almost by borrowing
from

Chapter 14 The cost of capital
Weighted Average Cost of Capital
(WACC)
WACC equation
kWACC kd (1 T )wd k ps wps kcs wcs
kWACC : weighted average cost of capital
k d : required rate of return of debt
wd : proportion of debt
k ps: required rate of retur

Chapter 7,8 Risk and return
Rate of return
Cash return = ending price + cash distribution
(dividend) beginning price
Rate of return = cash return / beginning price
Expected rate of return
Expected rate of return
n
exp ectedrateofreturn r Pi ri
i 1
Exa

Chapter 11, 12 Investment
decision criteria
Net present value (NPV)
This is the gold criteria for evaluating a new
investment opportunity
CFn
CF1
NPV CF0
.
1
(1 k )
(1 k ) n
Example: (k: cost of capital)
70,000
30,000
NPV $100,000
1
2
(1 0.17 ) (1 0