14-0 Divisional and Project Costs of Capital 14.5 Using the WACC as our discount rate is only appropriate for projects that have the same risk as the firm’s.

Slides:

Advertisements

Similar presentations

Cost of capital Chapter 12.

Advertisements

The Cost of Capital: Some Preliminaries The Cost of Equity

CHAPTER 10 The Cost of Capital.

McGraw-Hill/Irwin Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.

Key Concepts & Skills Calculate & explain A firm’s cost of common equity capital A firm’s cost of preferred stock A firm’s cost of debt A firm’s overall.

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

1 Risk, Return, and Capital Budgeting Chapter 12.

Chapter Outline The Cost of Capital: Introduction The Cost of Equity

1 Capital Budgeting Overview  Capital Budgeting is the set of valuation techniques for real asset investment decisions.  Capital Budgeting Steps estimating.

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Cost of Capital Chapter 12.

Chapter Outline The Cost of Capital: Introduction The Cost of Equity

Hurdle rates for projects

Estimating Hurdle Rates. Cost of Capital To evaluate project, need estimates of cashflows, and also estimate of an appropriate hurdle rate (r). Hurdle.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital Chapter Fourteen.

15-0 Chapter 15: Outline The Cost of Capital: Some Preliminaries The Cost of Equity The Costs of Debt and Preferred Stock The Weighted Average Cost of.

Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.

Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.

Key Concepts and Skills

Chapter 11 Weighted Average Cost of Capital  The Cost of Capital  Components of the Cost of Capital  Weighting the Components  Adjusting the Debt Component.

12.0 Chapter 12 Cost of Capital Key Concepts and Skills Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Corporate Finance 3e Ross, Thompson, Christensen, Westerfield and Jordan Slides.

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 12 Cost of Capital.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital Chapter Fifteen.

Weighted Average Cost of Capital

FIN 614: Financial Management Larry Schrenk, Instructor.

Cost of Capital and Efficient Capital Markets. Why Cost of Capital Is Important Cost of capital provides us with an indication of how the market views.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital Chapter Fifteen.

Chapter 12 Cost of Capital 0. Why Cost of Capital is Important Return is commensurate with Risk – always (SML) The cost of capital gives an indication.

Last Week.. Expected Returns and Variances

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital Chapter Fourteen Prepared by Anne Inglis, Ryerson University.

Risk, Return, and Capital Budgeting (Chapter 12) Financial Policy and Planning (MB 29)

Cost of Capital Chapter 14. Key Concepts and Skills Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost of debt.

Calculating divisional WACCs Use the same formula for WACC, but inputs are now division-specific How do we calculate beta for each division? – Divisions/segments.

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Cost of Capital Chapter 12.

14-0 Cost of Capital Chapter 14 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

FIN 614: Financial Management Larry Schrenk, Instructor.

Cost of Capital Professor Ronald Miolla. Agenda 1) What is Cost of Capital? 2) How to compute Cost of Capital. 3) Cost of debt. 4) Cost of equity.

COST OF CAPITAL Chapter 7. Chapter Outline The Cost of Capital: Introduction The Cost of Equity (CAPM and DDM) The Costs of Debt and Preferred Stock The.

Risk, Return, and Capital Budgeting What should be the appropriate Required Rate of Return (RROR) for discounting CFs of CB Projects?

12.0 Chapter 12 Cost of Capital Issues in Chapter 12 What is cost of capital? Why is cost of capital important? Know how to determine a firm’s cost.

Li CHAPTER 10 The Cost of Capital Sources of capital Component costs WACC Adjusting for risk.

1 Capital Budgeting Overview  Capital Budgeting is the set of valuation techniques for real asset investment decisions.  Capital Budgeting Steps estimating.

1 Ch 10: The Cost of Capital WACC = w d r d (1 - T) + w ps r ps + w ce r s The Cost of Capital: Preliminaries What is it? Why we care? The Cost of Capital:

T14.1 Chapter Outline Chapter 14 Cost of Capital Chapter Organization 14.1The Cost of Capital: Some Preliminaries 14.2The Cost of Equity 14.3The Costs.

Costs of Capital Weighted Average Cost of Capital (WACC)

1 Chapter 11 Calculating the Cost of Capital McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Cost of Capital and Efficient Capital Markets

13-1 Agenda for 3 August (Chapter 14) The Cost of Capital The Cost of Equity The Costs of Debt and Preferred Stock The Weighted Average Cost of Capital.

McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 12.0 Chapter 12 Cost of Capital.

Financial Management FIN300 Cost of Capital. Objectives Upon completion of this lesson, you will be able to: –Determine a firm’s cost of equity capital.

0 Chapter 15 Cost of Capital. 1 Chapter Outline The Cost of Capital: Some Preliminaries The Cost of Equity The Costs of Debt and Preferred Stock The Weighted.

Cost of Capital. Outline Meaning of Cost of Capital Significance of Cost of Capital Concept of Weighted Average Cost of Capital (WACC) Cost of Components.

Chapter 12 Cost of Capital!. Key Concepts and Skills Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost of debt.

Risk and the cost of capital

Cost of Capital Chapter 14 Notes to the Instructor:

Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.

McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 12.0 Chapter 12 Cost of Capital.

Chapter 14 Cost of Capital McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

1 Ch 7: Project Analysis Under Risk Incorporating Risk Into Project Analysis Through Adjustments To The Discount Rate, and By The Certainty Equivalent.

The Cost of Capital. Cost of Capital Key Concepts Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost of debt Know.

12-1 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin IMPORTANT: In order to view the correct calculator key.

Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.

The Cost of Capital. Cost of Capital Key Concepts Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost of debt Know.

Corporate Finance Cost of Capital. Cost of Capital Key Concepts Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost.

RISK, COST OF CAPITAL, AND CAPITAL BUDGETING This topic applies the concept of NPV to risky cash flows. NPV = C o + Σ C t ¯ /(1+r) t r = discount rate.

Cost of Capital Chapter Fourteen. Prof. Oh, KUMBA 2010Ch14-1 Corporate Finance Key Concepts and Skills  Know how to determine a firm’s cost of equity.

Cost of Capital Chapter 15 Reem Alnuaim.

Chapter 14 Cost of Capital.

Presentation transcript:

14-0 Divisional and Project Costs of Capital 14.5 Using the WACC as our discount rate is only appropriate for projects that have the same risk as the firm’s current operations If we are looking at a project that is NOT the same risk as the firm, then we need to determine the appropriate discount rate for that project Divisions also often require separate discount rates because they have different levels of risk LO5

14-1 Using WACC for All Projects - Example What would happen if we use the WACC for all projects regardless of risk? Assume the WACC = 15% ProjectRequired ReturnIRR A20%17% B15%18% C10%12% LO5

14-2 The Pure Play Approach Find one or more companies that specialize in the product or service that we are considering Compute the beta for each company Take an average Use that beta along with the CAPM to find the appropriate return for a project of that risk Often difficult to find pure play companies LO5

14-3 Subjective Approach Consider the project’s risk relative to the firm overall If the project is more risky than the firm, use a discount rate greater than the WACC If the project is less risky than the firm, use a discount rate less than the WACC You may still accept projects that you shouldn’t and reject projects you should accept, but your error rate should be lower than not considering differential risk at all LO5

14-4 Subjective Approach - Example Risk LevelDiscount Rate Very Low RiskWACC – 8% Low RiskWACC – 3% Same Risk as FirmWACC High RiskWACC + 5% Very High RiskWACC + 10% LO5