study material on finance 24

May 14th, 2015
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Financial system is that part of economy, which includes all the financial institutions and markets involved in –Moving savings from savers to borrowers

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Taylors UniversityDual Degree ProgramIntroductionto FinanceTopic 9Financial Issues:Cost of Capital1Acknowledgement Ross et al, 2008, Essentials of Corporate Finance, 6 th Ed, McGraw-Hill1-212-2Learning OutcomesAt the end of the lesson, students should beable to:determine a firms cost of equity capitaldetermine a firms cost of debtcalculate a firms overall cost of capital21-312-3Chapter OutlineThe Cost of Capital: Some PreliminariesThe Cost of EquityThe Costs of Debt and Preferred StockThe Weighted Average Cost of Capital(WACC) Divisional and Project Costs of Capital31-412-4Why Cost of Capital is Important We know that the return earned on assetsdepends on the risk of those assets The return to an investor is the same as the costto the company Also, knowing our cost of capital helps usdetermine our required return for capitalbudgeting projects41-512-5Required Return The required return is the same as theappropriate discount rate and is based on therisk of the cash flows We need to know the required return for aninvestment before we can compute the NPV andmake a decision about whether or not to take theinvestment We need to earn at least the required return tocompensate our investors for the financing theyhave provided51-612-6Cost of Equity The cost of equity is the return required byequity investors given the risk of the cashflows from the firm

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