tailieunhanh - Ebook Fundamentals of financial management (13th edition): Part 2

(BQ) Part 2 book "Fundamentals of financial management" has contents: The cost of capital, capital structure, and dividend policy, intermediate and long term financing, special areas of financial management. | Part 6 9/19/08 17:18 Page 381 The Cost of Capital, Capital Structure, and Dividend Policy 15 Required Returns and the Cost of Capital Contents l Creation of Value Objectives After studying Chapter 15, you should be able to: Industry Attractiveness • Competitive Advantage l Explain how a firm creates value, and identify the key sources of value creation. l Define the overall “cost of capital” of the firm. l Calculate the costs of the individual components of a firm’s overall cost of capital: cost of debt, cost of preferred stock, and cost of equity. l Evaluation of Projects on the Basis of Their Total Risk Explain and use alternative models to determine the cost of equity, including the dividend discount approach, the capital-asset pricing model (CAPM) approach, and the before-tax cost of debt plus risk premium approach. l Risk-Adjusted Discount Rate Approach • Probability Distribution Approach • Contribution to Total Firm Risk: Firm-Portfolio Approach • Conceptual Implications l Calculate the firm’s weighted average cost of capital (WACC) and understand its rationale, use, and limitations. l Explain how the concept of Economic Value Added (EVA) is related to value creation and a firm’s cost of capital. l Understand the capital-asset pricing model’s role in computing project-specific and groupspecific required rates of return. Overall Cost of Capital of the Firm Cost of Debt • Cost of Preferred Stock • Cost of Equity: Dividend Discount Model Approach • Cost of Equity: Capital-Asset Pricing Model Approach • Cost of Equity: Before-Tax Cost of Debt Plus Risk Premium Approach • Weighted Average Cost of Capital • Some Limitations • Rationale for a Weighted Average Cost • Economic Value Added (EVA) l The CAPM: Project-Specific and Group-Specific Required Rates of Return Capital-Asset Pricing Model Approach to Project Selection • Group-Specific Required Return • Some Qualifications • Ascribing Debt Funds to Groups l l Key Learning .