- CFA Exams
- Dec. 2020 Level 1
- Study Session 10. Corporate Finance I
- Reading 33. Cost of Capital
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. |