Financial Management, 12th Edition by Pearson

CHAPTER 9

The Cost of Capital

LEARNING OBJECTIVES

• Explain the general concept of the opportunity cost of capital.
• Distinguish between the project cost of capital and the firm’s cost of capital.
• Calculate cost of debt.
• Calculate the cost of equity.
• Determine the weighted average cost of capital.
• Explain the logic of the cost of capital for divisions.
• Demonstrate the methodology of calculating the ­divisional beta and divisional cost of capital.
• Illustrate the cost of capital calculation for a real company.

INTRODUCTION

We have emphasized in Chapter 8 that the use of the DCF techniques for evaluating an investment project requires two basic inputs: (1) the estimates of the project’s cash flows and (2) the discount rate. In our discussions ...