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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Cost of Capital

Learning Objectives

After studying this chapter in the textbook, you should be able to:

Explain what the cost of capital represents and why it is so important.

Estimate the cost of equity using the dividend growth model approach and the security market line approach.

Estimate the cost of debt and the cost of preferred stock.

Compute the weighted average cost of capital (WACC).

Understand when it is appropriate and to use the WACC as a measure of the firm's required rate of return.

Explain what errors are caused by using the WACC inappropriately.

Explain the pure play approach and know when it should be used.

Calculate the weighted average flotation cost and know how to incorporate this measure in an NPV analysis.

(Appendix 14A) Know how to apply the adjusted present value (APV) to analyze a capital budgeting opportunity.

(Appendix 14A) Know when it is appropriate to use APV as opposed to the WACC.

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