CHAPTER ELEVENCOST OF CAPITAL, HURDLE RATES, AND FINANCIAL STRUCTURE
Chapter 9 examined numerous capital investment analysis techniques, and Chapter 10 discussed how to determine cash flows through the use of numerous project examples. Paramount to the investment evaluation is the discount rate— the cost of capital. The cost of capital is the opportunity cost of funds invested in the firm. It represents the minimum acceptable rate of return for corporate investments. In the Chapter 10 new product example, a 0.5 percentage point change in the cost of capital (from 8.0 to 7.5 percent) had a significant impact on the net present value (NPV). The NPV increased by $564 thousand, or 60 percent.
For financial executives, managing the cost of capital ...
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