tailieunhanh - Lecture Corporate finance: A practical approach: Chapter 3 - CFA Institute

The cost of capital is the cost of using the funds of creditors and owners. The cost of capital for the company as a whole is often used as a basis for estimating project costs of capital. Chapter 3 calculate and interpret the weighted average cost of capital (WACC) of a company. | Chapter 3 Cost of Capital Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction The cost of capital is the cost of using the funds of creditors and owners. Creating value requires investing in capital projects that provide a return greater than the project’s cost of capital. When we view the firm as a whole, the firm creates value when it provides a return greater than its cost of capital. Estimating the cost of capital is challenging. We must estimate it because it cannot be observed. We must make a number of assumptions. For a given project, a firm’s financial manager must estimate its cost of capital. Copyright © 2013 CFA Institute 2 LOS: Calculate and interpret the weighted average cost of capital (WACC) of a company. Page 128 1. Introduction The cost of capital is the cost of using the funds of creditors and owners. The cost of capital for the company as a whole is often used as a basis for estimating project costs of capital. In Chapter 2, the cost of capital (also known as the required rate of return) is project specific. 2 2. Cost of capital The cost of capital is the rate of return that the suppliers of capital—bondholders and owners—require as compensation for their contributions of capital. This cost reflects the opportunity costs of the suppliers of capital. The cost of capital is a marginal cost: the cost of raising additional capital. The weighted average cost of capital (WACC) is the cost of raising additional capital, with the weights representing the proportion of each source of financing that is used. Also known as the marginal cost of capital (MCC). Copyright © 2013 CFA Institute 3 LOS: Calculate and interpret the weighted average cost of capital (WACC) of a company. Pages 128–129 Cost of Capital The cost of capital is the rate of return that the suppliers of capital—bondholders and owners—require as compensation for their contribution of capital. The cost of capital is a marginal cost because it is the cost associated with making an | Chapter 3 Cost of Capital Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction The cost of capital is the cost of using the funds of creditors and owners. Creating value requires investing in capital projects that provide a return greater than the project’s cost of capital. When we view the firm as a whole, the firm creates value when it provides a return greater than its cost of capital. Estimating the cost of capital is challenging. We must estimate it because it cannot be observed. We must make a number of assumptions. For a given project, a firm’s financial manager must estimate its cost of capital. Copyright © 2013 CFA Institute 2 LOS: Calculate and interpret the weighted average cost of capital (WACC) of a company. Page 128 1. Introduction The cost of capital is the cost of using the funds of creditors and owners. The cost of capital for the company as a whole is often used as a basis for estimating project costs of capital. In Chapter 2, the cost of capital (also