FIN20150 Chapter Notes - Chapter 14: Risk Premium, Capital Structure, Capital Asset Pricing Model
Document Summary
Cost of capital: the minimum required rate of return on a project needed in order to accept it. Weighted average cost of capital (wacc): the cost of capital for the firm as a whole can be interpreted as the required return on the overall firm. The return an investor in a security receives= the cost of that security to the company that used it. If the required return= 10%, this means that the investment will have a positive npv only if its return exceeds 10% In other words, the firm must earn 10% of the investment just to compensate investors for the use of the capital needed to finance the project. Cost of capital for a risk free investment= risk-free rate. The greater the risk of the cost of capital, the higher the required rate of return should exceed the risk-free rate.
