Business Finance

CH 12: THE COST OF CAPITAL

TOPICS:
1. Cost of Capital
2. Capital components
(Types of capital used, Debts, Preferred stock, Retained earnings, Common
stock)
3. The Logic of the Weighted Average Cost of Capital (WACC)
4. Component Costs of Capital
(Capital structure, rd = before-tax cost of debt (interest cost), r dT = rd(1-T) =
after tax cost of debt, rps = cost of preferred stock, r s = cost of retained
earnings, re = cost of external equity (new stock), CAPM (CAPITAL ASSET
PRICING MODEL), Discounted cash flow (DCF), Bond yield plus risk premium)
5. Finding Cost of Retained Earnings
(Slightly different estimates, based on logical assumptions, Average of three
methods)
6. Cost of Newly Issued Common Stock (External equity re)
7. Target Capital Structure (Optimal capital structure)
8. Weighted Average Cost of Capital (WACC)
9. Marginal Cost of Capital
10. Break Point
11. MCC Schedule
12. Combining the MCC and Investment Opportunity Schedules
13. WACC versus Required Rates of Return (Debt (Bonds), Preferred Stock,
Common Equity (Stock),)
CH 13: CAPITAL BUDGETING
TOPICS:
1. Capital Budgeting
2. Importance of Capital Budgeting
3. Project Classifications
(Replacement decisions, Expansion decisions, Independent projects, Mutually
exclusive projects)
4. Steps in the Valuation Process
5. Cash Flow Estimation
6. Problems in Cash Flow Estimation
(Sunk costs, Opportunity costs, Externalities, Shipping and Installation,
Inflation)
7. Identifying Incremental (Relevant) Cash Flows
(Initial investment outlay, Incremental operating cash flow, Terminal cash
flow)
8. Cash Flow Estimation and the Evaluation Process
(Expansion projects, Replacement analysis)
9. Capital Budgeting Evaluation Techniques
(Payback, Discounted Payback Period, Net present value (NPV), Internal rate of
return (IRR), Modified Internal Rate Return (MIRR))
10.Conclusions on the Capital Budgeting Decision Methods
11. Incorporating Risk in Capital Budgeting Analysis
 (Stand-alone risk, Scenario analysis, Worst-case scenario, Best-case scenario,
Base case, Corporate (within-firm) risk, Diversification (risk reduction), Beta
(market) risk, Project required rate of return, rproj, Pure play method)
12. How Project Risk is Considered in Capital Budgeting Decisions (Risk-adjusted
discount rate)
13. Capital Rationing
14. Multinational Capital Budgeting
(Repatriation of earnings, Exchange rate risk, Political risk)