February 2007
Intermediate to advanced
456 pages
15h 57m
English
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Chapter 9. Cost of Capital[*]
Many companies make decisions to build new facilities, invest in new machinery, or expend sums for other large projects without any idea of whether the return to be expected from these projects will exceed the cost of capital needed to fund them. As a result, a company may find that it is working furiously on any number of new projects, but seeing its ability to generate cash flow to repay debt or pay stockholders decline over time. To avoid this situation, it is necessary to calculate the return on investment, which is covered in the next chapter. In this chapter, we discuss the first part of the investment decision, which is the calculation of the cost of capital against which investment decisions must be compared. The chapter describes the primary components of a company’s capital, how the cost of each kind is combined to form a weighted cost of capital, and how this information should be most appropriately used when evaluating the return on new projects that require funding, as well as for discounting the cash flows from existing projects.
Components
Before determining the amount of a company’s cost of capital, it is necessary to determine its components. The following two sections describe in detail how to arrive at the cost of capital for these components. The weighted average calculation that brings together all the elements of the cost of capital is then described in the “Calculating the Weighted Cost of Capital” section.
The first component of ...
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O’Reilly covers everything we've got, with content to help us build a world-class technology community, upgrade the capabilities and competencies of our teams, and improve overall team performance as well as their engagement.Julian F.
I wanted to learn C and C++, but it didn't click for me until I picked up an O'Reilly book. When I went on the O’Reilly platform, I was astonished to find all the books there, plus live events and sandboxes so you could play around with the technology.Addison B.
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I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.