
Explore the cost of capital and how firms raise funds from equity, debt, and preferred shares, compute minimum returns, and account for flotation costs and net proceeds.
Assess the cost of capital from sources such as equity, debentures, and preferred shares, and apply before-tax and after-tax perspectives with flotation costs and net proceeds.
Learn to compute the cost of debt capital, including before- and after-tax costs, discounts, premiums, and maturity effects. Apply practical models to evaluate debt issues in financial management.
Assess the cost of debt within the cost of capital framework by evaluating premiums, long-term loans, and discount rates, and consider how a 30 percent tax rate affects debt financing.
Explore how to calculate the cost of equity within the cost of capital framework, using dividends, market price, and share issues.
Analyze the cost of retained earnings in financial management, examining how keeping profits for growth affects shareholder returns and the impact of capital gains versus income taxes.
Analyze the weighted average cost of capital (WACC) across equity, debt, and preferred shares, and explore how before- and after-tax costs shape the overall cost of capital.
Examine the cost of capital and wacc through a market perspective on risk, equity shares, and government subsidies, and how market value, premiums, and inflation affect capital decisions.
Analyze the weighted average cost of capital, including after-tax and before-tax costs, and the impact of corporate tax rates on the WACC.
Calculate the after-tax cost of capital and apply the WACC formula to evaluate capital investments, considering debt, equity, dividends, and tax effects.
In this course, the students will learn:
Concept of Cost of Capital
Cost of Debt Capital
Cost of Preference Share Capital
Cost of Equity Share Capital
Cost of Retained Earnings
Weighted Average Cost of Capital (WACC)
Cost of capital is the minimum rate of return that a business must earn before generating value. Before a business can turn a profit, it must at least generate sufficient income to cover the cost of the capital it uses to fund its operations. This consists of both the cost of debt and the cost of equity used for financing a business. The cost of capital is heavily dependent on the type of financing used in the business. A business can be financed through debt or strictly through equity. However, most companies employ a mixture of equity and debt to finance their businesses. Therefore, the cost of capital comes from the weighted average cost of all capital sources or the weighted average cost of capital. A company's securities typically debt, preference shares and equity, one must therefore calculate the cost of debt, cost of preference shares and the cost of equity to determine a company's cost of capital. Importantly, both cost of debt and equity must be forward looking, and reflect the expectations of risk and return in the future. This means, for instance, that the past cost of debt is not a good indicator of the actual forward looking cost of debt. Once cost of debt, preference shares and cost of equity have been determined, their blend, the weighted average cost of capital (WACC), can be calculated.