Summary Ch 9 The Cost of Capital - Corporate Finance (COF) (AIF) - Principles of Managerial Finance

The Cost of Capital
Chapter Number Chapter 9

Subject COF




The Cost of Capital 1

, 📖 Table of Contents

Outline
9.1 Overview of the Cost of Capital
THE BASIC CONCEPT
9.2 Cost of Long-Term Debt
NET PROCEEDS
BEFORE-TAX COST OF DEBT
Using Market Quotations
Calculating the Cost
Approximating the Cost
AFTER-TAX COST OF DEBT
9.3 Cost of Preferred Stock
CALCULATING THE COST OF PREFERRED STOCK
9.4 Cost of Common Stock
FINDING THE COST OF COMMON STOCK EQUITY
Using the Constant-Growth Valuation (Gordon Growth) Model
Using the Capital Asset Pricing Model (CAPM)
Flotation Costs and the Cost of Common Equity
COST OF RETAINED EARNINGS
9.5 Weighted Average Cost of Capital
CALCULATING THE WEIGHTED AVERAGE COST OF CAPITAL
(WACC)




9.1 Overview of the Cost of Capital

📍 cost of capital
Represents the firm’s cost of financing and is the minimum rate of return
that a project must earn to increase the firm’s value.


positive NPVs = Investment return > cost of capital

negative NPVs = Investment return < cost of capital → decreases firm value


THE BASIC CONCEPT




The Cost of Capital 2