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Chapter 15 The Cost of Capital and Taxation Issues in Project Evaluation Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 15–1 Prepared by Dr Buly Cardak Learning Objectives • Understand the concept of the cost of capital. • Understand the effect of risk on the cost of capital. • Understand how the cost of capital can be measured under the imputation tax system. • Understand why the cost of capital for a company is expressed as a weighted average of the costs of all of the company’s sources of capital. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 15–2 Prepared by Dr Buly Cardak Learning Objectives (cont.) • Estimate the cost of each source of capital and combine these costs into a weighted average cost of capital for a company. • Explain how to treat issue costs in project evaluation. • Understand the distinction between the cost of capital for a project and a company’s weighted average cost of capital. • Estimate the cost of capital for a division of a diversified company. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 15–3 Prepared by Dr Buly Cardak Learning Objectives (cont.) • Understand the advantages and disadvantages of using the weighted average cost of capital in project evaluation. • Understand the effects of taxes on project cash flows. • Understand the application of the certainty equivalent method of incorporating risk into project evaluation. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 15–4 Prepared by Dr Buly Cardak Net Present Value Analysis • Calculation requires: – Net cash flows. – Required rate of return/cost of capital. – Consistency in the definition of cash flows and the discount rate applied to the cash flows. • Required rate of return = opportunity cost. • Opportunity cost of capital: rate of return that could be earned on another investment of similar risk. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 15–5 Prepared by Dr Buly Cardak ... - tailieumienphi.vn