About This Chapter
Cost of Capital - Chapter Summary and Learning Objectives
In this chapter, our instructors take you through the cost considerations that businesses face when trying to raise capital. Our lessons were designed by experienced instructors who are available to answer your questions. By the end of this chapter you will understand:
- Cost of capital
- Required return
- Financial policy
- The dividend growth model
- Costs of equity and debt
- The weighted average cost of capital
- The divisional cost of capital
- Project specific discount rates
- Flotation cost, NPV, and internal equity
|Required Return vs. Cost of Capital||Learn how companies balance the cost of capital with the amount they must make on any investment.|
|Financial Policy & the Cost of Capital||Discover links between financial policy and the cost of capital.|
|The Dividend Growth Model||Study the implementation, advantages, and disadvantages of the dividend growth model.|
|Cost of Equity & the SML Approach||Look at how the cost of equity relates to the security market line.|
|The Cost of Debt & Preferred Stock||Explore the costs associated with incurring debt and issuing preferred stocks.|
|Weighted Average Cost of Capital||Learn about capital structure weights, taxes, and the weighted average cost of capital.|
|Divisional Cost of Capital||Examine what happens when specific divisions of a company have different risk profiles than the over-all organization.|
|How to Estimate a Project Specific Discount Rate||Learn different approaches to estimating project specific discount rates.|
|Cost of Capital: Flotation Cost, NPV & Internal Equity||Discover how the cost of capital relates to flotation costs, NPV, and internal equity.|
1. Required Return vs. Cost of Capital
Let's take a look at how required return and cost of capital each offer different perspectives in figuring out the opportunity cost of different investment decisions.
2. Financial Policy & the Cost of Capital
In this lesson, we'll be learning about financial policy and the cost of capital. A financial policy is very important to any company, and it helps to drive the decisions alongside the cost of capital.
3. The Dividend Growth Model
The dividend growth model is used to determine the basic value of a company's stock, regardless of current industry conditions. This lesson explores the model and its use to make accurate comparisons of stock issued by companies in varied industries.
4. The Cost of Debt & Preferred Stock
In this lesson, we'll define debt and preferred stock. You'll learn about the two types of debt and associated costs. We'll also discuss the costs of issuing preferred stock.
5. Weighted Average Cost of Capital
Let's see how calculating the weighted average cost of capital can help a business make a decision about going ahead with a new project. This lesson takes you through the process and illustrates the WACC calculation.
6. Divisional Cost of Capital
How does a company know if an investment in the expansion of a specific division is a good idea? In this lesson, we'll examine the divisional cost of capital and how it can help business leaders make informed decisions about spending money for a segment of their business.
7. How to Estimate a Project Specific Discount Rate
How do businesses figure out whether or not to invest in a project? In this lesson, we'll examine how to evaluate the returns of a project, including the cost of capital and the pure play and subjective approaches to discounting the cost of capital.
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Other chapters within the Finance 101: Principles of Finance course
- Introduction to Corporate Finance
- Financial Statements, Taxes & Cash Flow
- Financial Statement Basics
- Long-Term Financial Planning & Growth
- Introduction to Valuation Methods
- Discounted Cash Flow Valuation
- Interest Rates & Bond Valuation
- Stock Valuation
- Net Present Value & Investment Basics
- Capital Investment Decisions
- Accounting Risk & Return
- Return, Risk, & the Security Market Line
- Options & Corporate Finance
- Financial Leverage & Capital Structure
- Dividends & Dividend Policy
- Short-Term Financing & Planning
- Cash & Liquidity Management
- Credit & Inventory Management
- International Corporate Finance
- Studying for Finance 101