MGT339H5 Lecture Notes - Lecture 1: Capital Asset, Market Risk, Weighted Arithmetic Mean
Document Summary
Future cash flows capital investment = net present value or revenue exp = net income. Cost of capital = input money into company. Where money comes from = debt or equity. Debt = borrow money obligated to pay back loan + interest. Equity = borrow money, yet they have ownership of company (shareholders) Re = vegetarian e/v is the fraction of the pizza (1/3) Rd = meat love d/v is the fraction of the pizza (2/3) To divide up cost of the most expensive meat lover pizza and cheaper vegetarian pizza. 20 = re (e/v) + rd (d/v) to make sure each person pays the right amount. (equity x cost of equity) + (debt x cost of debt) = weighted average cost of capital (wacc) company"s capital. Cost of capital depends on use of funds and not on source of funds.
