13

The Cost of Capital

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Jeff Greenberg/Alamy

Learning Objectives

image Explain what the weighted average cost of capital for a firm is and why it is often used as a discount rate to evaluate projects.

image Calculate the cost of debt for a firm.

image Calculate the cost of common stock and the cost of preferred stock for a firm.

image Calculate the weighted average cost of capital for a firm, explain the limitations of using a firm's weighted average cost of capital as the discount rate when evaluating a project, and discuss the alternatives to the firm's weighted average cost of capital that are available.

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