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1、LEARNINGOBJECTIVESAfterstudyingthischapter,youshouldunderstand:LO1Howtodetermineafirm’scostofequitycapital.COSTOFCAPITALLO2Howtodetermineafirm’scostofdebt.LO3Howtodetermineafirm’soverallcostofcapital.14LO4Howtocorrectlyincludeflotationcostsincapitalbudgetingprojects.L
2、O5Someofthepitfallsassociatedwithafirm’soverallcostofcapitalandwhattodoaboutthem.WITHOVER95,000EMPLOYEESONFIVEcapital,orWACC,plusapremium.So,whatexactlyisCONTINENTS,Germany-basedBASFisamajortheWACC?internationalcompany.ThecompanyoperatesinaTheWACCistheminimumreturn
3、acompanyneedsvarietyofindustries,includingagriculture,oilandgas,toearntosatisfyallofitsinvestors,includingstockhold-chemicals,andplastics.Inanattempttoincreaseers,bondholders,andpreferredstockholders.In2007,value,BASFlaunchedBASF2015,acomprehensiveforexample,BASFp
4、eggeditsWACCat9percent,andplanthatincludedallfunctionswithinthecompanyitincreasedthisfigureto10percentin2008.Inthisandchallengedandencouragedallemployeestoactchapter,welearnhowtocomputeafirm’scostofcapitalinanentrepreneurialmanner.Themajorfinancialandfindoutwhatitmean
5、stothefirmanditsinvestors.componentofthestrategywasthatthecompanyWewillalsolearnwhentousethefirm’scostofcapital,expectedtoearnitsweightedaveragecostofand,perhapsmoreimportant,whennottouseit.Mastertheabilitytosolveproblemsinthischapterbyusingaspreadsheet.AccessExcelM
6、asteronthestudentWebsitewww.mhhe.com/rwj.Supposeyouhavejustbecomethepresidentofalargecom-pany,andthefirstdecisionyoufaceiswhethertogoaheadwithaplantorenovatethecompany’swarehousedistributionsystem.Theplanwillcostthecompany$50million,anditisexpectedtosave$12millionp
7、eryearaftertaxesoverthenextsixyears.Thisisafamiliarproblemincapitalbudgeting.Toaddressit,youwoulddeterminetherelevantcashflows,discountthem,and,ifthenetpresentvalueispositive,takeontheproject;iftheNPVisnegative,youwouldscrapit.Sofar,sogood;butwhatshouldyouuseasthed
8、iscountrate?Fromourdiscussionofriskandreturn,youknowthatthecorrectdiscountratedependsontheriskinessoftheprojecttorenovatethewarehousedistributionsystem.
