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Chapter 15 Required Returns and the Cost of Capital 15.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. After Studying Chapter 15, you should be able to: 1. Explain how a firm creates value and identify the key sources of value creation. 2. Define the overall “cost of capital” of the firm. 3. Calculate the costs of the individual components of a firm’s cost of capital - cost of debt, cost of preferred stock, and cost of equity. 4. Explain and use alternative models to determine the cost of equity, including the dividend discount approach, the capital-asset pricing model (CAPM) approach, and the before-tax cost of debt plus risk premium approach. 5. Calculate the firm’s weighted average cost of capital (WACC) and understand its rationale, use, and limitations. 6. Explain how the concept of economic Value added (EVA) is related to value creation and the firm’s cost of capital. 7. Understand the capital-asset pricing model`s role in computing project-specific and group-specific required rates of return. 15.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Required Returns and the Cost of Capital • Creation of Value • Overall Cost of Capital of the Firm • Project-Specific Required Rates • Group-Specific Required Rates • Total Risk Evaluation 15.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Key Sources of Value Creation Industry Attractiveness Growth phase of product cycle Barriers to competitive entry Other --e.g., patents, temporary monopoly power, oligopoly pricing Cost Marketing and price Perceived quality Superior organizational capability Competitive Advantage 15.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Overall Cost of Capital of the Firm Cost of Capital is the required rate of return on the various types of financing. The overall cost of capital is a weighted average of the individual required rates of return (costs). 15.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. ... - tailieumienphi.vn
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