Fundamentals of Corporate Finance

11

The Cost of Capital

Learning Objectives

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.

Calculate the cost of debt for a firm.

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

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.

The Walt Disney Company announced in May 2010 that it would build a new hotel at Walt Disney World, its first new hotel at that theme park in seven years. The hotel, which is now being opened in several phases, has been named “Disney's Art of Animation Resort.” It is being built on a 65-acre parcel of land across the lake from Disney's Pop Century Resort and will have 1,120 suites and 864 traditional hotel rooms when completed. Disney executives ...