Learning Outcome Statements

1. Cost of Capital

a. calculate and interpret the weighted average cost of capital (WACC) of a company;

b. describe how taxes affect the cost of capital from different capital sources;

c. describe the use of target capital structure in estimating WACC and how target capital structure weights may be determined;

d. explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget;

e. explain the marginal cost of capital's role in determining the net present value of a project;

2. Cost of Debt and Preferred Stock

f. calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach;

g. calculate and interpret the cost of noncallable, nonconvertible preferred stock;

3. Cost of Common Equity

h. calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach;

4. Estimating Beta and Determining a Project Beta

i. calculate and interpret the beta and cost of capital for a project;

5. Country Risk

j. describe uses of country risk premiums in estimating the cost of equity;

6. Marginal Cost of Capital Structure

k. describe the marginal cost of capital schedule, explain why it may be upward-sloping with respect to additional capital, and calculate and interpret its break-points;

7. Flotation Costs

l. explain and demonstrate the correct treatment of flotation costs.