CORPOR∫E FINANCIA小D MANAGEMEN」 PART III CAPITAL INVESTMENT DECISION (chapter 8-11) 州经怡贸易大号 UNW原s方C等NTE3风制U方男0G0Cs
CORPORATE FINANCIAL CORPORATE FINANCIAL MANAGEMENT MANAGEMENT PART III CAPITAL INVESTMENT DECISION (chapter 8-11)
Chapter 11 The Cost of Capital 渊补经价货多方居 YO年NEB证事00003
Chapter 11 Chapter 11 The Cost of Capital
Introduction 1.Weighted Average Cost of Capital 2.Component Costs 3.Marginal Cost of Capital 渊补经价货多方居 YO年NEB证事00003
Introduction Introduction 1. Weighted Average Cost of Capital 2. Component Costs 3. Marginal Cost of Capital
1.Weighted Average Cost of Capital ●Cost of capital What the firm must pay for capital The return required by investors Minimum rate of return required on new investments Determined in the capital markets Depends on the risk associated with the firm's activities Equal to the equilibrium rate of return demanded by investors in the capital markets for securities of that degree of risk 渊外校价贫量方是 老YO年NE证事0EO0h3
4 1. Weighted Average Cost of Capital zCost of capital – What the firm must pay for capital – The return required by investors – Minimum rate of return required on new investments – Determined in the capital markets – Depends on the risk associated with the firm’s activities Equal to the equilibrium rate of return demanded by investors in the capital markets for securities of that degree of risk
Continued... Weighted Average Cost of Capital:k Discount rate used when computing the NPV of a project of average risk Hurdle rate used in conjunction with the IRR Based on the after-tax cost of capital Obtained from the weighted costs of the individual components Weights equal to the proportion of each of the components in the target capital structure 渊外校价贫多方号 YO年NEB证事0000
5 Continued Continued… zWeighted Average Cost of Capital: ka – Discount rate used when computing the NPV of a project of average risk – Hurdle rate used in conjunction with the IRR – Based on the after-tax cost of capital – Obtained from the weighted costs of the individual components – Weights equal to the proportion of each of the components in the target capital structure