Financial Times Handbook of Corporate Finance, 2nd Edition

10

WHAT IS THE COMPANY’S COST OF CAPITAL?

IntroductionA word of warningThe required rate of returnTwo sides of the same coinThe weighted average cost of capital (WACC)The cost of equity capitalThe cost of retained earningsThe cost of debt capitalThe cost of preference share capitalHybrid securitiesCalculating the weightsThe WACC with three or more types of financeClassic errorWhat about short-term debt?Applying the WACC to projects and SBUsWhat do managers actually do?Pre-tax and post-tax WACCImplementation issuesWhich risk-free rate?Fundamental betaSome thoughts on the cost of capitalConclusionNotes

Introduction

Until this point a cost of capital (required rate of return) has been assumed for, say, a project or a business unit strategy, ...