Reading 33. Cost of Capital
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Learning Outcome Statements
|Reading 33. Cost of Capital|
|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.