Long-Term Financial Decisions
PART 4
Long-Term Financial Decisions
CHAPTERS IN THIS PART
11 12 13
The Cost of Capital Leverage and Capital Structure Dividend Policy
INTEGRATIVE CASE 4 O’GRADY APPAREL COMPANY
CHAPTER 11
The Cost of Capital
INSTRUCTOR’S RESOURCES
Overview This chapter introduces the student to an important financial concept, the cost of capital. The mechanics of computing the sources of capital-debt, preferred stock, common stock, and retained earnings are reviewed. The relationship between the cost of capital and both the firm's financing activities and capital investment decisions is explored. In the framework of a target capital structure, the weighted average cost of capital is then applied to capital investment decisions.
PMF DISK PMF Tutor: Cost of Capital Topics from this chapter covered in the PMF Tutor are after-tax cost of debt; cost of preferred stock; cost of common stock, CAPM; cost of common stock, constant growth; cost of new common stock; and weighted average cost of capital. PMF Problem- Solver: Cost of Capital This module allows the student to determine the following: 1) cost of long-term debt (bonds), 2) cost of preferred stock, 3) cost of common stock, 4) weighted average cost of capital, and 5) weighted marginal cost of capital. PMF Templates Spreadsheet templates are provided for the following problems: Problem 11-6 11-7 Topic Cost of preferred stock Cost of common stock equity–CAPM
293
Part 4 Long-Term Financial Decisions
Study Guide Suggested Study Guide examples for classroom presentation: Example 7 8 Topic Weighted average cost of capital Marginal cost of capital schedule
294
Chapter 11 The Cost of Capital
ANSWERS TO REVIEW QUESTIONS 11-1 The cost of capital is the rate of return a firm must earn on its investment in order to maintain the market value of its stock. The cost of capital provides a benchmark against which the potential rate of return on an investment is compared.. Holding business risk
Long-Term Financial Decisions
CHAPTERS IN THIS PART
11 12 13
The Cost of Capital Leverage and Capital Structure Dividend Policy
INTEGRATIVE CASE 4 O’GRADY APPAREL COMPANY
CHAPTER 11
The Cost of Capital
INSTRUCTOR’S RESOURCES
Overview This chapter introduces the student to an important financial concept, the cost of capital. The mechanics of computing the sources of capital-debt, preferred stock, common stock, and retained earnings are reviewed. The relationship between the cost of capital and both the firm's financing activities and capital investment decisions is explored. In the framework of a target capital structure, the weighted average cost of capital is then applied to capital investment decisions.
PMF DISK PMF Tutor: Cost of Capital Topics from this chapter covered in the PMF Tutor are after-tax cost of debt; cost of preferred stock; cost of common stock, CAPM; cost of common stock, constant growth; cost of new common stock; and weighted average cost of capital. PMF Problem- Solver: Cost of Capital This module allows the student to determine the following: 1) cost of long-term debt (bonds), 2) cost of preferred stock, 3) cost of common stock, 4) weighted average cost of capital, and 5) weighted marginal cost of capital. PMF Templates Spreadsheet templates are provided for the following problems: Problem 11-6 11-7 Topic Cost of preferred stock Cost of common stock equity–CAPM
293
Part 4 Long-Term Financial Decisions
Study Guide Suggested Study Guide examples for classroom presentation: Example 7 8 Topic Weighted average cost of capital Marginal cost of capital schedule
294
Chapter 11 The Cost of Capital
ANSWERS TO REVIEW QUESTIONS 11-1 The cost of capital is the rate of return a firm must earn on its investment in order to maintain the market value of its stock. The cost of capital provides a benchmark against which the potential rate of return on an investment is compared.. Holding business risk