O'Reilly logo

Corporate Finance Workbook: A Practical Approach, Second Edition by George H. Troughton, CFA, Martin S. Fridson, CFA, Michelle R. Clayman, CFA

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 3

COST OF CAPITAL

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • Calculate and interpret the weighted average cost of capital (WACC) of a company.
  • Describe how taxes affect the cost of capital from different capital sources.
  • Explain alternative methods of calculating the weights used in the WACC, including the use of the company’s target capital structure.
  • Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget.
  • Explain the marginal cost of capital’s role in determining the net present value of a project.
  • Calculate and interpret the cost of fixed rate debt capital using the yield-to-maturity approach and the debt-rating approach.
  • Calculate and interpret the cost of noncallable, nonconvertible preferred stock.
  • Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount approach, and the bond yield plus risk premium approach.
  • Calculate and interpret the beta and cost of capital for a project.
  • Explain the country equity risk premium in the estimation of the cost of equity for a company located in a developing market.
  • Describe the marginal cost of capital schedule, explain why it may be upward sloping with respect to additional capital, and calculate and interpret its break points.
  • Explain and demonstrate the correct treatment of flotation costs.

SUMMARY OVERVIEW

  • The weighted average cost of capital ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required