公司理财13868.pptVIP

Chapter 4 Financing Theory Section I: Cost of Capital 4.1 Cost of capital In corporate finance, the cost of capital is very important : Capital budgeting is based on the correct estimating of capital cost. The other important decisions also require the estimating of capital cost. In order to the maximum of corporate value, cost of capital must be minimum. 4.1 Cost of capital Think over: Cost of capital =? The opportunity cost of capital =? The required return of investors =? the discount rate of cash flow 4.1 Cost of capital The cost of capital is the opportunity cost of funds of the firm’s investors; It is the rate of return that could be earned in the capital markets with a similar amount of risk; It is also the return the firm must earn on its investment in order to satisfy the required rate of return of the firm’s investors. 4.1 Cost of capital So, remember the following concepts are equivalent: The cost of capital The opportunity of capital cost The require rate of return of investors The discount rate 4.1 Cost of capital Notice: Cost of capital depends on the risk of investment! 4.1 Cost of capital Think over: When the rate of return of a investment project is 10%, what’s the meaning? … … 4.1 Cost of capital The concept of capital cost can be expressed by the following formula: 4.2 Weighted average cost of capital A weighted cost of the individual costs of financing, which is equal to the cost of each source of financing multiplied by the percentage of the financing provided by that source. 4.2 Weighted average cost of capital Think over: Why not the individual cost of capital but the weighted cost of capital is used by the corporate? … … 4.2 Weighted average cost of capital The example of Poling company（P203）。 4.2 Weighted average cost of capital So, a firm should never use a single cost of financing as the hurdle rate (discount rate) for making capital budgeting decisions. Particularly when we use debt, we have implicitly used up some of our debt