Financial Management: Principles and Applications (Chapter 14: The Cost of Capital)

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Learning Objectives:

  1. Understand the concepts underlying the firm’s overall cost of capital and the purpose for its calculation.
  2. Evaluate a firm’s capital structure, and determine the relative importance (weight) of each source of financing.
  3. Calculate the after-tax cost of debt, preferred stock, and common equity.
  4. Calculate a firm’s weighted average cost of capital.
  5. Discuss the pros and cons of using multiple, risk-adjusted discount rates and describe the divisional cost of capital as a viable alternative for firms with multiple divisions.
  6. Adjust the NPV for the costs of issuing new securities when analyzing new investment opportunities.

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