BFF2140 Lecture Notes - Lecture 10: Preferred Stock, Weighted Arithmetic Mean, Capital Budgeting
Document Summary
E(cid:454)plai(cid:374) the d(cid:396)ive(cid:396)s of the fi(cid:396)(cid:373)"s ove(cid:396)all (cid:272)ost of (cid:272)apital. Apply the weighted average cost of capital to value projects. Adjust the cost of capital for the risk associated with the projects. Account for the direct costs of raising external capital. We know that the return earned on assets depends on the risk of those assets (higher risk assets mean wacc higher too). The return to an investor is the same as the cost to the company (investors will require a return at. Least compensating them for the risk they take in investing) Cost of capital thus provides us with an indication of how the market views the risk of the companies assets. Knowing the cost of capital can also help us determine the required return for capital budgeting projects (cid:373)i(cid:374)i(cid:373)u(cid:373) (cid:396)etu(cid:396)(cid:374) to (cid:862)(cid:271)(cid:396)eak eve(cid:374)(cid:863) a(cid:374)d at least (cid:272)ove(cid:396) ou(cid:396) (cid:272)osts!
