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    Review Q's Chap 9

    Uploaded by

    Katrina Paquiz
    The document discusses the cost of capital and how it is used to evaluate investment decisions. It defines cost of capital as the minimum funds required to finance a project and explains that the return on a project should exceed the cost of capital for the project to be profitable. It also discusses different methods for determining the costs of different sources of capital like debt and equity and how these costs are weighted to calculate the overall weighted average cost of capital (WACC), which reflects the average cost of all capital after accounting for different capital sources. The WACC is important for investment decisions because it shows if a project's expected returns can cover the costs of the financing.

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    Review Q's Chap 9

    Uploaded by

    Katrina Paquiz
    9 views3 pages
    The document discusses the cost of capital and how it is used to evaluate investment decisions. It defines cost of capital as the minimum funds required to finance a project and explains that the return on a project should exceed the cost of capital for the project to be profitable. It also discusses different methods for determining the costs of different sources of capital like debt and equity and how these costs are weighted to calculate the overall weighted average cost of capital (WACC), which reflects the average cost of all capital after accounting for different capital sources. The WACC is important for investment decisions because it shows if a project's expected returns can cover the costs of the financing.

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    review q's chap 9

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    The document discusses the cost of capital and how it is used to evaluate investment decisions. It defines cost of capital as the minimum funds required to finance a project and explains that the return on a project should exceed the cost of capital for the project to be profitable. It also discusses different methods for determining the costs of different sources of capital like debt and equity and how these costs are weighted to calculate the overall weighted average cost of capital (WACC), which reflects the average cost of all capital after accounting for different capital sources. The WACC is important for investment decisions because it shows if a project's expected returns can cover the costs of the financing.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    9 views3 pages

    Review Q's Chap 9

    Uploaded by

    Katrina Paquiz
    The document discusses the cost of capital and how it is used to evaluate investment decisions. It defines cost of capital as the minimum funds required to finance a project and explains that the return on a project should exceed the cost of capital for the project to be profitable. It also discusses different methods for determining the costs of different sources of capital like debt and equity and how these costs are weighted to calculate the overall weighted average cost of capital (WACC), which reflects the average cost of all capital after accounting for different capital sources. The WACC is important for investment decisions because it shows if a project's expected returns can cover the costs of the financing.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    9-1

    Capital cost indicates the minimum fund used to finance a specific project. Because the cost of capital
    represents the opportunity cost a firm is willing to take, the return should at least cover the cost of
    capital to yield a profit.

    9-2

    When the firm earns revenue, the shareholders benefit the most. They can determine the amount of
    return by efficiently examining the project's cost of capital. The cost of capital becomes a vital factor in a
    company's long-term investment choice since it reflects the possible reward and the associated risk of
    an investment.

    9-3

    The capital structure is an important consideration in a company's decision-making process. It denotes


    the finance alternative accessible to the firm in order to continue operations or buy a required asset. As
    a result, while making investment and financial decisions, financial managers analyze a company's
    capital structure. A business can choose between debt and equity funding.

    9-4

     Long-term debts
     Preferred stocks
     Common stocks
     Retained earnings

    9-5

    The net proceeds are the cash the corporation receives after subtracting the cost and other
    administrative fees from the sale of a bond or other securities.

    Flotation costs are the flotation expenses are the total costs of issuing and selling securities, most often
    by a publicly listed firm.

    the cost of flotation directly impacts the sale's net proceeds. The net proceeds obtained can be reduced
    if the flotation cost is higher, while the net proceeds received can be increased if the floatation cost is
    lower.

    9-6

    Various methods used to determine the before-tac cost of debt are:

     Quotation
     Calculation
     Approximating

    9-7
    9-9

    9-10

    This method presupposes that the dividend amount and the stock's fair value both rise at the same rate.
    As a result, the present value of all future dividend earnings is proportional to the share of stock.

    9-11

    Regarding theory and math, the two techniques of assessing the cost of common stock equity differ. The
    required return is considered equal to the present value of all future dividends in the constant-growth
    model. In the capital asset pricing model, the cost of common stock, on the other hand, considers the
    firm's risk, as assessed by beta.

    9-12

    Financing a project by issuing new common stock entailed additional expenditures, such as floatation
    charges, because the stocks were previously sold at a lower price than the market price on the other
    hand, financing using retained earnings results in very small capital outflows from the firm because the
    retained earnings were utilised.

    Because of the variables above, the cost of issuing new stocks is comparatively greater than the cost of
    funding the project with retained earnings.

    9-13
    The weighted average cost of capital (WACC) is the firm's long-term average cost of capital after
    accounting for all capital sources. Common stocks, preferred stocks, and long-term debts are the
    primary sources of capital considered in estimating the WACC.

    9-14

    The weighted average capital cost is generally calculated using a weighting system such as target weight.
    The three primary sources of long-term capital considered for calculating the WACC are common stock
    equity, preferred stock, and long-term indebtedness. Target weights values are derived from a firm's
    desired capital structure proportions.

    As a result, a firm's target weights are used to calculate its weighted average cost of capital.

    9-15

    Target weight focuses on the firm's ideal or goal proportions, either in terms of book or market value.

    Historical weights are determined by the firm's present and historical capital structure.

    The preferred weighing scheme is the target weight because it is more efficient in calculating the
    weighted average cost of capital for the company.

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