SOC 202 Lecture Notes - Project Y, Weighted Arithmetic Mean, Capital Budgeting
Document Summary
Lo1 how to determine a firm"s cost of equity capital. Lo2 how to determine a firm"s cost of debt. Lo3 how to determine a firm"s overall cost of capital. Lo4 how to correctly include flotation costs in capital budgeting projects. Lo5 some of the pitfalls associated with a firm"s overall cost of capital and what to do about them. Answers to concepts review and critical thinking questions. 7. (lo3) it is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this, value is created. (lo3) book values for debt are likely to be much closer to market values than are equity book values. (lo5) no. The cost of capital depends on the risk of the project, not the source of the money. (lo3) interest expense is tax-deductible. There is no difference between pretax and aftertax equity costs. (lo1) the primary advantage of the dcf model is its simplicity.