上海财经大学杨葵corporation finance-less08-wacc

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1、LearningObjectives1.ShowhowtoevaluatethecostofagivenLessonprojectwithinacompany.2.DemonstratewhatweightedcostofcapitalEight(WACC)isandhowitisusedtocalculateprojectcosts.3.Identifythecomponentsofacompany’sCostofCapitalcapitalstructure.LearningObjectivesIn

2、troduction¢Agoodestimateofafirm’scostofcapitalis4.Nametworeasonswhythecostofasecurityimportantbecauseitformsthebasisforcapitaltoacompanydiffersfromitsyieldincapitalbudgetingevaluationmarkets.¢InInthislessonwelookat:Inthislessonwelookat:5.Distinguishbetwe

3、enmarketandbookvaluesòbasicconceptsinunderstandingthenotionofaincalculatingWACCsofprojects.company’scostofcapitalòdetailedproceduresforestimatingthecostofcapitalforagivenlevelofbusinessriskandcapitalstructureòhowthediscountratecanbedevelopedforindividual

4、projectswhenriskdeviatessubstantiallyWhatsourcesofcapitalshouldbeShouldwefocusonShouldwefocusonbeforebefore--taxtaxororincludedinafirm’sWACC?afterafter--taxtaxcapitalcosts?capitalcosts?¢LongLong--termdebttermdebtStockholdersfocusonafter-taxcashflowsThusf

5、ocusonflows.Thus,focusonA-TcapitalTcapital¢PreferredstockPreferredstockcosts,i.e.,useA-TcostsinWACC.¢Commonequity:Onlykdneedsadjustment.––RetainedearningsRetainedearnings––NewcommonstockNewcommonstockShouldwefocusonhistorical(embedded)BasicConceptscostso

6、rnew(marginal)costsornew(marginal)costs?costs?¢Firmscanrelyonaproportionofdebt,preferredshares,andcommonequityfortheirfinancing¢CapitalStructureCapitalStructure––asummaryofafirm’sasummaryofafirm’sThecostofcapitalisusedprimarilyThecostofcapitalisusedprima

7、rilyobligationsobligationstoinvestorsobligationstoinvestorstomakedecisionswhichinvolve¢Fromthecapitalstructure,theWACCcanberaisingnewcapital.So,focusondetermined¢WACC=costofdebtxB/Vtoday’smarginalcosts.+costofpreferredsharesxP/V+costofcommonequityxE/Vwhe

8、reV=B+P+EUseoftheWACCUseoftheWACC¢Acommonapproximationistoassume¢Therearethreebasicapplicationsofthatafirm’sindividualprojectshavethecostofcapital:roughlythesameriskasthatforthe¢iiininvesttmenttevalltiuationoverallcompanya