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This presentation is an overview Cost of Capital. Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed). Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata. Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata

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Capital Budgeting

Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods like net present value (NPV) and internal rate of return (IRR) discount future cash flows to determine if a project will provide sufficient returns. The capital budgeting process involves project generation, evaluation using techniques like NPV or IRR, and selection of projects that meet acceptance criteria.

Cost of capital

detailed explanation on cost of capital - useful the students of undergraduate, post graduate and professional course students pursuing finance

Cost of capital

,
cost of capital
,
bond
,
preferred stock
,
factors influencing cost of capital determination
,
cost of new common stock
,
cost of debt components
,
cost of preferred stock
,
components of cost of capital

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...Dayana Mastura FCCA CA

This document discusses weighted average cost of capital (WACC) which is a calculation of a firm's cost of capital considering the costs of the different components of the firm's capital structure (debt, equity, preference shares). It defines WACC and explains its importance as the minimum return a firm needs to earn on new projects/investments to break even. The document also outlines how to calculate WACC and the costs of each capital component (cost of equity using CAPM, cost of debt, cost of preference shares). It discusses how WACC is used as a benchmark for projects, in determining leverage limits, for valuation, and in discounting cash flows in a DCF analysis.Accounting rate of return

The document defines accounting rate of return (ARR) as the ratio of estimated accounting profit to average investment. ARR is calculated by taking the average accounting profit and dividing it by the average investment. Projects should be accepted if their ARR is greater than or equal to the required accounting rate of return, and between mutually exclusive projects the one with the highest ARR should be accepted. An example calculation is shown to illustrate determining ARR for a project with initial investment, annual cash inflows, depreciation, and scrap value.

Cost of Preference Capital Soved Problems-kp

The Preference Capital carries a cost. The Cost of Preference Capital is calculated as follows:
Preference Shares may be issued at Par, Premium, Discount.
Cost of Redeemable Preference Shares

Cost Of Capital

This document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm must earn on its investments to maintain its market value and attract funds. It then discusses how to calculate the costs of different sources of capital including long-term debt, preferred stock, common stock, and retained earnings. It explains how to calculate the weighted average cost of capital (WACC) and discusses weighting schemes. Finally, it discusses how to determine break points and calculate the weighted marginal cost of capital (WMCC), which can be used with the investment opportunities schedule to make financing decisions.

Cost of capital

What is cost of capital? Factors included in Cost of capital, calculation of Weighted Average Capital, etc.

Capital Budgeting

Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods like net present value (NPV) and internal rate of return (IRR) discount future cash flows to determine if a project will provide sufficient returns. The capital budgeting process involves project generation, evaluation using techniques like NPV or IRR, and selection of projects that meet acceptance criteria.

Cost of capital

detailed explanation on cost of capital - useful the students of undergraduate, post graduate and professional course students pursuing finance

Cost of capital

,
cost of capital
,
bond
,
preferred stock
,
factors influencing cost of capital determination
,
cost of new common stock
,
cost of debt components
,
cost of preferred stock
,
components of cost of capital

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...Dayana Mastura FCCA CA

This document discusses weighted average cost of capital (WACC) which is a calculation of a firm's cost of capital considering the costs of the different components of the firm's capital structure (debt, equity, preference shares). It defines WACC and explains its importance as the minimum return a firm needs to earn on new projects/investments to break even. The document also outlines how to calculate WACC and the costs of each capital component (cost of equity using CAPM, cost of debt, cost of preference shares). It discusses how WACC is used as a benchmark for projects, in determining leverage limits, for valuation, and in discounting cash flows in a DCF analysis.Accounting rate of return

The document defines accounting rate of return (ARR) as the ratio of estimated accounting profit to average investment. ARR is calculated by taking the average accounting profit and dividing it by the average investment. Projects should be accepted if their ARR is greater than or equal to the required accounting rate of return, and between mutually exclusive projects the one with the highest ARR should be accepted. An example calculation is shown to illustrate determining ARR for a project with initial investment, annual cash inflows, depreciation, and scrap value.

Cost of Preference Capital Soved Problems-kp

The Preference Capital carries a cost. The Cost of Preference Capital is calculated as follows:
Preference Shares may be issued at Par, Premium, Discount.
Cost of Redeemable Preference Shares

Cost Of Capital

This document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm must earn on its investments to maintain its market value and attract funds. It then discusses how to calculate the costs of different sources of capital including long-term debt, preferred stock, common stock, and retained earnings. It explains how to calculate the weighted average cost of capital (WACC) and discusses weighting schemes. Finally, it discusses how to determine break points and calculate the weighted marginal cost of capital (WMCC), which can be used with the investment opportunities schedule to make financing decisions.

Cost of capital

What is cost of capital? Factors included in Cost of capital, calculation of Weighted Average Capital, etc.

Internal rate of return(IRR)

Internal rate of returns is that rate at which the sum of discounted cash inflow equals the sum of discounted cash outflow

valuation of securities

The document discusses various methods for valuing different types of securities. It covers the valuation of debentures, preference shares, and equity shares. For debentures and preference shares, the valuation models discount future interest and principal cash flows to arrive at a present value. For equity shares, the dividend capitalization approach discounts expected future dividends, while the earnings capitalization approach discounts future earnings. Growth must be considered for shares but not for debentures or preference shares that offer fixed cash flows.

Cost of capital

This document discusses the cost of capital. It defines cost of capital as the minimum rate of return that a firm must earn on its investments to maintain its value. Cost of capital has several components, including the return at zero risk, and premiums for business risk and financial risk. The document also discusses the different types of capital like debt, equity and retained earnings, and how to compute the cost of each. It explains weighted average cost of capital is calculated by weighting the costs of different sources of capital by their proportions.

Dividend theories

The document discusses several theories on corporate dividend policies:
1. Dividend relevance theories argue that a firm's dividend policy impacts its value. Walter's and Gordon's models show how value is determined based on factors like earnings, dividends, growth rates, and costs of capital.
2. Dividend irrelevance theories, proposed by Modigliani and Miller, state that a firm's value depends only on its investment policy, not its dividend policy.
3. The bird-in-hand theory suggests that even in situations of equal growth rates and costs of capital, investors prefer dividends in-hand to future capital gains due to uncertainty.

Cost Of Capital

Cost of capital is the minimum rate of return that a firm must earn on its investments to maintain its market value. It includes the explicit costs like interest on debt and the implicit opportunity costs of foregoing alternative investments. The cost of capital is calculated separately for different sources of capital like debt, preference shares, equity, and retained earnings using various models and weighted averaged to obtain the overall cost based on the firm's capital structure.

Risk and return

Managerial Finance. "Risk and Return". Types of risk. Required return. Correlation. Diversification. Beta coefficient. Risk of a portfolio. Capital Asset Pricing Model. Security Market Line.

risk and return

risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,

Cost of capital

The document discusses the cost of capital. It defines cost of capital as the minimum return expected by investors for providing capital to a company. It includes the costs of debt, equity, preference shares, and retained earnings. The weighted average cost of capital takes the costs of different sources of capital weighted by their proportions. Calculating cost of capital is important for capital budgeting and evaluating new projects and investments.

Time value of money

time value of money
,
concept of time value of money
,
significance of time value of money
,
present value vs future value
,
solve for the present value
,
simple vs compound interest rate
,
nominal vs effective annual interest rates
,
future value of a lump sum
,
solve for the future value
,
present value of a lump sum
,
types of annuity
,
future value of an annuity

Capital structure-theories

This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata

Capital budgeting techniques

This chapter discusses capital budgeting techniques used to evaluate long-term investment projects. It covers the payback period method, which calculates the number of years to recover the initial investment of a project from its cash inflows. The chapter provides examples of calculating payback periods for projects and discusses the pros and cons of the payback method, noting it does not take the time value of money into account but is intuitive. It also introduces net present value and internal rate of return techniques.

Bond Valuation

This presentation discusses bond valuation. It defines bonds and bond valuation, which includes calculating the present value of future interest payments and the bond's value at maturity. It then discusses various ways to calculate bond returns, including coupon rate, current yield, spot interest rate, and yield to maturity. It also covers bond price valuation, bond risks, bond duration, and five principles of bond pricing theorems.

Cost of capital

The document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm requires to increase its market value. It then discusses:
1) The sources of capital for a firm including debt, equity, preference shares, and retained earnings.
2) How to calculate the weighted average cost of capital (WACC) by determining the costs of each source and weighting them based on proportion of total capital.
3) Methods to calculate the costs of different sources like debt, preference shares, equity, and retained earnings. This includes considering factors like tax rates, issue premiums/discounts, and growth rates.

Functions of finance

The document discusses various aspects of financial markets in India. It begins by defining what comprises the Indian financial market, including the primary market, FDI, alternative investments, banking/insurance/pensions, and asset management. It then provides more details on some of the key components of the Indian financial market, including the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), Over-the-Counter Exchange of India (OTCEI), and the Securities and Exchange Board of India (SEBI) which regulates the securities market. The document concludes by discussing the integration of financial markets, including the benefits of integration such as more efficient price signals, reduced arbitrage opportunities, and increased efficacy of monetary policy.

Investment analysis

The document discusses key concepts for investment analysis and project selection, including:
1) Projects should yield a return greater than the minimum hurdle rate, which is higher for riskier projects. Returns should consider cash flows, timing, and side effects.
2) The optimal financing mix minimizes the hurdle rate and matches the assets financed.
3) If not enough high-returning investments exist, excess cash should be returned to stockholders.

Optimal capital structure

Optimal capital structure is the proportion of debt, preference shares, and equity that results in the lowest weighted average cost of capital and highest firm value. It is achieved by balancing debt and equity financing in a way that maximizes the market value per equity share while maintaining financial stability and minimizing financial risk. An optimal structure takes advantage of tax benefits of debt but is difficult to determine precisely due to complex market factors that influence equity values.

Cost of capital ppt

The document defines the cost of capital as the minimum required rate of return on invested funds. It discusses how the cost of capital is helpful for capital budgeting and structure decisions. It then outlines the different components of cost of capital - cost of debt, preferred shares, equity shares, and retained earnings. Various formulas are provided for calculating the costs of redeemable and irredeemable debt, preferred shares, and equity shares. The cost of retained earnings is said to equal the cost of equity shares.

Valuation of securities

* Risk free rate (Rf) = 3%
* Expected market return (Rm) = 9%
* Beta (β) of RIL = 1.9
* Risk premium (Rm - Rf) = 9% - 3% = 6%
* Using the CAPM formula:
Ki = Rf + β(Rm - Rf)
= 3% + 1.9(6%)
= 3% + 11.4%
= 14.4%
Therefore, according to the CAPM, the expected rate of return for RIL shares is 14.4%

Risk, return, and portfolio theory

The document discusses risk and return in investments. It defines key concepts such as realized and expected return, ex-ante and ex-post returns, sources and measurements of risk including standard deviation and coefficient of variation. It also discusses the risk-return tradeoff and how higher risk investments require higher potential returns to compensate for additional risk.

Arbitrage pricing theory (apt)

The document discusses the Arbitrage Pricing Theory (APT), which assumes an asset's return depends on various macroeconomic, market, and security-specific factors. The APT model estimates the expected return of an asset based on its sensitivity to common risk factors like inflation, interest rates, and market indices. It was developed by Stephen Ross in 1976 as an alternative to the Capital Asset Pricing Model. The APT formula predicts an asset's return based on factor risk premiums and the asset's sensitivity to each factor.

Cost of capital

This document discusses the weighted average cost of capital (WACC) and its components. It addresses how to calculate WACC using the costs of debt, preferred stock, and common equity weighted by the target capital structure. It also discusses adjusting component costs for taxes and risk and determining the weights. Project risk can be standalone, corporate, or market risk and may require adjusting the composite WACC. Risk adjustments are made subjectively based on a project's estimated beta.

capital asset pricing model for calculating cost of capital for risk for risk...

capital asset pricing model for calculating cost of capital for risk for risk...University of Balochistan

cost of capital, beta, risk, risky project,weighted average cost of capital, market efficiency, semi-efficient market, weak efficient marketInternal rate of return(IRR)

Internal rate of returns is that rate at which the sum of discounted cash inflow equals the sum of discounted cash outflow

valuation of securities

The document discusses various methods for valuing different types of securities. It covers the valuation of debentures, preference shares, and equity shares. For debentures and preference shares, the valuation models discount future interest and principal cash flows to arrive at a present value. For equity shares, the dividend capitalization approach discounts expected future dividends, while the earnings capitalization approach discounts future earnings. Growth must be considered for shares but not for debentures or preference shares that offer fixed cash flows.

Cost of capital

This document discusses the cost of capital. It defines cost of capital as the minimum rate of return that a firm must earn on its investments to maintain its value. Cost of capital has several components, including the return at zero risk, and premiums for business risk and financial risk. The document also discusses the different types of capital like debt, equity and retained earnings, and how to compute the cost of each. It explains weighted average cost of capital is calculated by weighting the costs of different sources of capital by their proportions.

Dividend theories

The document discusses several theories on corporate dividend policies:
1. Dividend relevance theories argue that a firm's dividend policy impacts its value. Walter's and Gordon's models show how value is determined based on factors like earnings, dividends, growth rates, and costs of capital.
2. Dividend irrelevance theories, proposed by Modigliani and Miller, state that a firm's value depends only on its investment policy, not its dividend policy.
3. The bird-in-hand theory suggests that even in situations of equal growth rates and costs of capital, investors prefer dividends in-hand to future capital gains due to uncertainty.

Cost Of Capital

Cost of capital is the minimum rate of return that a firm must earn on its investments to maintain its market value. It includes the explicit costs like interest on debt and the implicit opportunity costs of foregoing alternative investments. The cost of capital is calculated separately for different sources of capital like debt, preference shares, equity, and retained earnings using various models and weighted averaged to obtain the overall cost based on the firm's capital structure.

Risk and return

Managerial Finance. "Risk and Return". Types of risk. Required return. Correlation. Diversification. Beta coefficient. Risk of a portfolio. Capital Asset Pricing Model. Security Market Line.

risk and return

risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,

Cost of capital

The document discusses the cost of capital. It defines cost of capital as the minimum return expected by investors for providing capital to a company. It includes the costs of debt, equity, preference shares, and retained earnings. The weighted average cost of capital takes the costs of different sources of capital weighted by their proportions. Calculating cost of capital is important for capital budgeting and evaluating new projects and investments.

Time value of money

time value of money
,
concept of time value of money
,
significance of time value of money
,
present value vs future value
,
solve for the present value
,
simple vs compound interest rate
,
nominal vs effective annual interest rates
,
future value of a lump sum
,
solve for the future value
,
present value of a lump sum
,
types of annuity
,
future value of an annuity

Capital structure-theories

This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata

Capital budgeting techniques

This chapter discusses capital budgeting techniques used to evaluate long-term investment projects. It covers the payback period method, which calculates the number of years to recover the initial investment of a project from its cash inflows. The chapter provides examples of calculating payback periods for projects and discusses the pros and cons of the payback method, noting it does not take the time value of money into account but is intuitive. It also introduces net present value and internal rate of return techniques.

Bond Valuation

This presentation discusses bond valuation. It defines bonds and bond valuation, which includes calculating the present value of future interest payments and the bond's value at maturity. It then discusses various ways to calculate bond returns, including coupon rate, current yield, spot interest rate, and yield to maturity. It also covers bond price valuation, bond risks, bond duration, and five principles of bond pricing theorems.

Cost of capital

The document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm requires to increase its market value. It then discusses:
1) The sources of capital for a firm including debt, equity, preference shares, and retained earnings.
2) How to calculate the weighted average cost of capital (WACC) by determining the costs of each source and weighting them based on proportion of total capital.
3) Methods to calculate the costs of different sources like debt, preference shares, equity, and retained earnings. This includes considering factors like tax rates, issue premiums/discounts, and growth rates.

Functions of finance

The document discusses various aspects of financial markets in India. It begins by defining what comprises the Indian financial market, including the primary market, FDI, alternative investments, banking/insurance/pensions, and asset management. It then provides more details on some of the key components of the Indian financial market, including the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), Over-the-Counter Exchange of India (OTCEI), and the Securities and Exchange Board of India (SEBI) which regulates the securities market. The document concludes by discussing the integration of financial markets, including the benefits of integration such as more efficient price signals, reduced arbitrage opportunities, and increased efficacy of monetary policy.

Investment analysis

The document discusses key concepts for investment analysis and project selection, including:
1) Projects should yield a return greater than the minimum hurdle rate, which is higher for riskier projects. Returns should consider cash flows, timing, and side effects.
2) The optimal financing mix minimizes the hurdle rate and matches the assets financed.
3) If not enough high-returning investments exist, excess cash should be returned to stockholders.

Optimal capital structure

Optimal capital structure is the proportion of debt, preference shares, and equity that results in the lowest weighted average cost of capital and highest firm value. It is achieved by balancing debt and equity financing in a way that maximizes the market value per equity share while maintaining financial stability and minimizing financial risk. An optimal structure takes advantage of tax benefits of debt but is difficult to determine precisely due to complex market factors that influence equity values.

Cost of capital ppt

The document defines the cost of capital as the minimum required rate of return on invested funds. It discusses how the cost of capital is helpful for capital budgeting and structure decisions. It then outlines the different components of cost of capital - cost of debt, preferred shares, equity shares, and retained earnings. Various formulas are provided for calculating the costs of redeemable and irredeemable debt, preferred shares, and equity shares. The cost of retained earnings is said to equal the cost of equity shares.

Valuation of securities

* Risk free rate (Rf) = 3%
* Expected market return (Rm) = 9%
* Beta (β) of RIL = 1.9
* Risk premium (Rm - Rf) = 9% - 3% = 6%
* Using the CAPM formula:
Ki = Rf + β(Rm - Rf)
= 3% + 1.9(6%)
= 3% + 11.4%
= 14.4%
Therefore, according to the CAPM, the expected rate of return for RIL shares is 14.4%

Risk, return, and portfolio theory

The document discusses risk and return in investments. It defines key concepts such as realized and expected return, ex-ante and ex-post returns, sources and measurements of risk including standard deviation and coefficient of variation. It also discusses the risk-return tradeoff and how higher risk investments require higher potential returns to compensate for additional risk.

Arbitrage pricing theory (apt)

The document discusses the Arbitrage Pricing Theory (APT), which assumes an asset's return depends on various macroeconomic, market, and security-specific factors. The APT model estimates the expected return of an asset based on its sensitivity to common risk factors like inflation, interest rates, and market indices. It was developed by Stephen Ross in 1976 as an alternative to the Capital Asset Pricing Model. The APT formula predicts an asset's return based on factor risk premiums and the asset's sensitivity to each factor.

Internal rate of return(IRR)

Internal rate of return(IRR)

valuation of securities

valuation of securities

Cost of capital

Cost of capital

Dividend theories

Dividend theories

Cost Of Capital

Cost Of Capital

Risk and return

Risk and return

risk and return

risk and return

Cost of capital

Cost of capital

Time value of money

Time value of money

Capital structure-theories

Capital structure-theories

Capital budgeting techniques

Capital budgeting techniques

Bond Valuation

Bond Valuation

Cost of capital

Cost of capital

Functions of finance

Functions of finance

Investment analysis

Investment analysis

Optimal capital structure

Optimal capital structure

Cost of capital ppt

Cost of capital ppt

Valuation of securities

Valuation of securities

Risk, return, and portfolio theory

Risk, return, and portfolio theory

Arbitrage pricing theory (apt)

Arbitrage pricing theory (apt)

Cost of capital

This document discusses the weighted average cost of capital (WACC) and its components. It addresses how to calculate WACC using the costs of debt, preferred stock, and common equity weighted by the target capital structure. It also discusses adjusting component costs for taxes and risk and determining the weights. Project risk can be standalone, corporate, or market risk and may require adjusting the composite WACC. Risk adjustments are made subjectively based on a project's estimated beta.

capital asset pricing model for calculating cost of capital for risk for risk...

capital asset pricing model for calculating cost of capital for risk for risk...University of Balochistan

cost of capital, beta, risk, risky project,weighted average cost of capital, market efficiency, semi-efficient market, weak efficient marketFin15

The document discusses the cost of capital and how it relates to a firm's capital structure. It defines cost of capital as the minimum return a firm must earn on an investment to justify undertaking the project. It then explains weighted average cost of capital (WACC), which weights the cost of equity and debt based on their proportions of a firm's total capital. WACC depends on the use of funds rather than their source. The document also discusses how to calculate costs of equity, debt, and WACC, and notes firms can potentially lower their WACC and increase value by optimizing their debt-to-equity ratio through financial leverage. However, increased financial risk must also be considered.

Chapter 10.The Cost of Capital(WACC)

The document discusses the cost of capital and how to calculate the weighted average cost of capital (WACC) for a firm. It explains the different sources of capital including debt, preferred stock, and common equity. It also discusses how to estimate the costs of each type of capital and calculate WACC, as well as how to adjust the WACC for project-specific risks that differ from the average risk of the firm.

Chapter10 thecostofcapital

This document discusses methods for calculating the cost of capital, including the cost of debt, equity, and preference shares. It outlines the Capital Asset Pricing Model (CAPM) approach for estimating the cost of equity, as well as other methods like the dividend yield plus risk premium approach and the dividend discount model. It also discusses how to calculate the weighted average cost of capital (WACC) using target capital structure weights. Additionally, it notes some issues that companies face in estimating their cost of capital and common misconceptions about the concept.

Cost Of Capital in the Telco Industry

How to determine cost of capital (WACC) in the telecommunications industry? What are the main driver?

Adl 13-financial-management

The document discusses various concepts related to financial management including cost of capital. It defines controller and treasurer roles, and explains that in the Indian context, the controller typically takes on treasury responsibilities as well. It then provides examples of calculating present value of cash flows, rates of interest for loan repayment installments, weighted average cost of capital, and analyzing leverage and risk positions for different companies.

Revision materials cf mba wic

This document discusses capital budgeting and the capital budgeting process. It covers key steps like generating investment ideas, analyzing proposals using techniques like net present value, internal rate of return, and payback period. It also discusses types of capital projects, rules of analysis, and definitions. The second half covers cost of capital, including costs of equity, debt, and preferred stock. It provides examples of calculating these costs and weighted average cost of capital (WACC), which weights the costs based on the firm's target capital structure.

Unit 3 Cost of capital JNTUA Syllabus_Financial Management

The main types of dividends are cash dividends which are payments made to shareholders in cash, bonus shares which increase the number of shares held, and special dividends which are additional non-recurring payments over regular dividends usually due to abnormal profits. Dividends can also be interim dividends paid during the year or annual dividends paid once a year. Regular cash dividends refer to the expected annual dividend payments a company aims to maintain.

InstructionsThe objective of the Case Debriefings is to revi

Instructions
The objective of the Case Debriefings is to revisit the cases in light of the class discussions and demonstrate your comprehension of salient issues, frameworks used for analysis, and the implications of the courses of action considered during the case discussions.
For each case, you should briefly describe the context and the problem, analytical tools used to address the problem, and critical lessons learned. In your reflection essay, you are not expected to replicate the solution. Your discussion should focus on synthesis; you should emphasize what you learned and its practical value.
You should use the following outline to structure your debriefing and make sure that you address the issues outlined above. You can use graphics, tables, and charts to make your point.
Outline:
Case Context
Problem/Analytical Issues
Tools used
Critical lessons learned
Concluding Remarks
Your debriefing should be authentic and not exceed 2 pages excluding charts and tables (12 pt characters) . You should think carefully and write effectively communicating the most critical takeaways from the case discussion. Please submit your work in MS Word doc or docx format.
Air Thread Connections
Case Analysis
Dr. Bulent Aybar
Professor of International Finance
1
In 2007, American Cable Communications (ACC) was faced with the decision of whether or not to buy out AirThread Connections (ATC), a large regional cellular provider.
At the time ACC was one of the largest cable companies in the United States, with an expected revenue of $30.9 billion and net income of $2.6 million.
The potential acquisition of ATC would allow ACC to fill an identified market gap by offering more bundled services (video, internet, landline, and wireless).
ACC would also be in a better position to ward off the competitive threat from wireless networks.
© Dr. C. Bulent Aybar
ACC’s Potential Acquisition of ATC: Strategic Logic
The ACC approaches acquisitions using an LBO type framework.
The company hopes to maximize returns by minimizing its equity in the investment and taking advantage of interest tax shields.
The debt will then be paid down using the target’s cash flows until a long-term sustainable D/V ratio is attained.
Given American Cable’s approach to ATC acquisition, a pertinent question is the impact of debt policy on the valuation.
© Dr. C. Bulent Aybar
Valuation Approach: Which Method?
The changing debt balance in the first period (or explicit forecast period) rules out FCFF method which is dependent on WACC. That would require periodic re-estimation of WACC.
However, once a constant target debt ratio is reached, FCFF method can be deployed.
We can use a bifurcated model where we employ the APV method for the first period as the D/E ratio declines, and switch to FCF method for the terminal period.
© Dr. C. Bulent Aybar
Bifurcated Valuation Model
During the terminal value period, the capital structure ratios are assumed to be constant while ...

Chapter 12 Cost Of Capital

The document discusses the cost of capital and how it is calculated. It can be summarized as:
1) The cost of capital is the weighted average rate that a firm is expected to pay to fund its assets and operations with different sources of capital such as debt, preferred stock, and common equity.
2) It is calculated by determining the market value proportion of each capital component, the market return expected by investors in each component, and adjusting for factors like taxes and flotation costs.
3) The weighted average cost of capital (WACC) represents the firm's hurdle rate and is used to evaluate whether potential projects can earn more than this required return.

Weighted Average Cost of Capital

The document discusses the components of the cost of capital, including debt, preferred stock, and common equity. It provides methods for calculating the costs of each component, such as using bond yields for the cost of debt. The weighted average cost of capital (WACC) is calculated using the costs of each component weighted by the target capital structure weights. Factors that influence the WACC include market conditions, the firm's capital structure and investment policy. The document also discusses approaches for adjusting the cost of capital for divisions or projects based on their specific risks.

Ch. 6ed Cost of Capital.ppt.ppt

The document provides an overview of cost of capital concepts including the components of cost of capital (debt, preferred stock, common equity), weighted average cost of capital (WACC), and factors that affect the WACC. It then discusses various methods for calculating the cost of different capital components, including the cost of debt, cost of preferred stock, and cost of common equity using the capital asset pricing model (CAPM), dividend capitalization model, and own-bond-yield-plus-risk-premium method. Examples are provided to illustrate how to apply these methods to determine the weighted average cost of capital for a company.

ch 10; cost of capital

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1. The primary goal of corporations is shareholder wealth maximization, which translates to maximizing stock price. Firms should behave ethically and have responsibilities to society.
2. Common stock represents ownership, with owners electing directors who hire management to maximize stock price.
3. Valuing a corporation involves discounting projected free cash flows at the weighted average cost of capital (WACC) to determine the value of operations, plus the value of non-operating assets.
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Sheet1
Solution
:-A) Computation of WACC:-Cost of equity (Ke) will be calculated using dividend discount model which is as under:-Price of share (P0) = D1/(Ke-g)Ke = (D1/(P0*(1-f))) + gWhere,D1 = D0*(1+g)F = Flotation costKe = ((2.50*(1+6%))/(50*(1-10%))) + 6%Ke = 11.89%i) Equity financing and debt financing are two different sources of financing being used by the organizations to procure funds. Equity and debt are two different sources of financing, equity financing represents internal source of finance whereas debt financing represent external source of finance. Mixture of both is always used by the business organizations to procure funds and is most commonly known as target ratio or capital structure ratio. This ration varies from industry to industry and company and company depending upon various circumstances, equity financing can be raised only through issuing shares in market by the help of initial public offer whereas debt financing can be raise from many sources such as bonds, long term loans, money market instruments etc.Equity Financing has following advantages:1. The total cash flows generated can be used solely for investment purpose, rather than paying back the investors.2. Funds can be raised in shorter time as compared to other sources of funds.However, in equity financing, dilution of ownership easily occurs and more investors can lead to loss of Control.Cost of debt (Kd) will be calculated as follows:-Kd = Market rate of deb*(1-tax rate)Kd = 5%*(1-35%)Kd = 3.25%Debt is a more common source of finance used by most of the organizations, the reason for the same is as follows:-a. Debt is cheaper source of finance as compared to equity the reason being the cost associated with issuing the common stock like. Underwriters commission, legal expenses, various registration charges, issuing of prospectus, printing of various documents etc.b. Debt financing provide leverage to the company which will increase the Earning per Share (EPS) which in turn leads to increase in market value of share, this helps organization to maximize its market capitalization.However, if the expansion venture does not work in favour of the company, then these obligations of repayment of principal and interest may turnout to be a burden to the company. WACC = (Ke*We) + (Kd*Wd)WACC = (11.89%*70%) + (3.25%*30%)WACC = 9.30%B) Computation of NPV of project A:-Depreciation = Cost of the asset – salvage value Life of the asset = 1,500,000/ 3 = 500,000Calculation of cash flows:Revenue – 1,200,000Less Cost – 600,000Less Depreciation – 500,000Profit - 100,000Less taxes (35%) 35,000Profit after taxes .

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Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
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China's Investment Leader - Dr. Alyce SU

In World Expo 2010 Shanghai – the most visited Expo in the World History
https://www.britannica.com/event/Expo-Shanghai-2010
China’s official organizer of the Expo, CCPIT (China Council for the Promotion of International Trade https://en.ccpit.org/) has chosen Dr. Alyce Su as the Cover Person with Cover Story, in the Expo’s official magazine distributed throughout the Expo, showcasing China’s New Generation of Leaders to the World.

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Explore the world of investments with an in-depth comparison of the stock market and real estate. Understand their fundamentals, risks, returns, and diversification strategies to make informed financial decisions that align with your goals.

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5 Compelling Reasons to Invest in Cryptocurrency Now

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How to Invest in Cryptocurrency for Beginners: A Complete Guide

Dr. Alyce Su Cover Story - China's Investment Leader

Dr. Alyce Su Cover Story - China's Investment Leader

Navigating Your Financial Future: Comprehensive Planning with Mike Baumann

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The various stages, after the initial invitation has been made to the public ...

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Tiểu luận: PURPOSE OF BUDGETING IN SME.docx

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China's Investment Leader - Dr. Alyce SU

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- 1. Dr. S. Ghose
- 2. Cost of Capital Cost of Capital - The return the firm’s investors could expect to earn if they invested in securities with comparable degrees of risk Capital Structure - The firm’s mix of long term financing and equity financing
- 3. Cost of Capital The cost of capital represents the overall cost of financing to the firm The cost of capital is normally the relevant discount rate to use in analyzing an investment The overall cost of capital is a weighted average of the various sources: WACC = Weighted Average Cost of Capital WACC = After-tax cost x weights
- 4. Sources of long-term capital Long-Term Capital Long-Term Debt Preferred Stock Common Stock Retained Earnings New Common Stock
- 5. Cost of Capital: Needed for Investment (capital budgeting) decisions – neither the NPV rule nor the IRR rule can be implemented without knowledge of the appropriate discount rate Financing decisions – the optimal/target capital structure minimizes the cost of capital Operating decisions – cost of capital is used by regulatory agencies in order to determine the “fair” return in some regulated industries (e.g. electric utilities)
- 6. Cost of Debt The cost of debt to the firm is the effective yield to maturity (or interest rate) paid to its bondholders Since interest is tax deductible to the firm, the actual cost of debt is less than the yield to maturity: After-tax cost of debt = yield x (1 - tax rate) The cost of debt should also be adjusted for flotation costs (associated with issuing new bonds)
- 7. with stock with debt EBIT 400,000 400,000 - interest expense 0 (50,000) EBT 400,000 350,000 - taxes (34%) (136,000) (119,000) EAT 264,000 231,000 Example: Tax effects of financing with debt Now, suppose the firm pays Rs.50,000 in dividends to the shareholders
- 8. with stock with debt EBIT 400,000 400,000 - interest expense 0 (50,000) EBT 400,000 350,000 - taxes (34%) (136,000) (119,000) EAT 264,000 231,000 - dividends (50,000) 0 Retained earnings 214,000 231,000 Example: Tax effects of financing with debt
- 9. Cost of Debt After-tax cost Before-tax cost Tax of Debt of Debt Savings 33,000 = 50,000 - 17,000 OR 33,000 = 50,000 ( 1 - .34) Or, if we want to look at percentage costs: -=
- 10. Cost of Debt After-tax Before-tax Marginal % cost of % cost of x tax Debt Debt rate Kd = kd (1 - T) .066 = .10 (1 - .34) -= 1
- 11. EXAMPLE: Cost of Debt ABC Corporation issues a Rs.1,000 par, 20 year bond paying the market rate of 10%. Coupons are annual. The bond will sell for par since it pays the market rate, but flotation costs amount to Rs.50 per bond. What is the pre-tax and after-tax cost of debt?
- 12. EXAMPLE: Cost of Debt Pre-tax cost of debt: 950 = 100(PVIFA 20, Kd) + 1000(PVIF 20, Kd) using a financial calculator: Kd = 10.61% After-tax cost of debt: Kd = Kd (1 - T) Kd = .1061 (1 - .34) Kd = .07 = 7% So a 10% bond costs the firm only 7% (with flotation costs) because interest is tax deductible
- 13. Cost of Debentures (Redeemable) Kd = {Interest(1-Tax Rate) + (Redeemable Value – Net Sale Proceeds)/N} (Redeemable Value + Net Sale Proceeds)/2 Kd = {I (1-t) + (RV – SP)/N} (RV + SP)/2
- 14. Cost of Preference Shares Kp = {Preference Dividend (1+Dividend Tax) + (Redeemable Value – Net Sale Proceeds)/N} (Redeemable Value + Net Sale Proceeds)/2 Kp = {Dp (1+Dt) + (RV – SP)/N} (RV + SP)/2
- 15. Cost of New Preferred Stock Preferred stock: has a fixed dividend (similar to debt) has no maturity date dividends are not tax deductible and are expected to be perpetual or infinite Cost of preferred stock = dividend price - flotation cost
- 16. Cost of Equity: Retained Earnings Why is there a cost for retained earnings? Earnings can be reinvested or paid out as dividends Investors could buy other securities, and earn a return. Thus, there is an opportunity cost if earnings are retained
- 17. Cost of Equity: Retained Earnings Common stock equity is available through retained earnings (R/E) or by issuing new common stock: Common equity = R/E + New common stock
- 18. Cost of Equity: New Common Stock The cost of new common stock is higher than the cost of retained earnings because of flotation costs selling and distribution costs (such as sales commissions) for the new securities
- 19. Cost of Equity
- 20. The Dividend Growth Model Approach Estimating the cost of equity: the dividend growth model approach According to the constant growth (Gordon) model, D1 P0 = ke - g Rearranging D1 ke = P0 + g
- 21. Drawbacks of Dividend Growth Model Some firms concentrate on growth and do not pay dividends at all, or only irregularly Growth rates may also be hard to estimate Also this model doesn’t adjust for market risk Not applicable if dividends aren’t growing at a reasonably constant rate Extremely sensitive to the estimated growth rate – an increase in g of 1% increases the cost of equity by 1% Does not explicitly consider risk
- 22. Capital Asset Pricing Model (CAPM) )( fmf RRβRkj Cost of capital Risk-free return Average rate of return on common stocks (WIG) Co-variance of returns against the portfolio (departure from the average) B < 1, security is safer than WIG average B > 1, security is riskier than WIG average
- 23. The Security Market Line (SML) Required rate of return Percent 0.5 1.0 1.5 2.0 SML = Rf + (Km – Rf) Beta (risk) Market risk premium 20.0 18.0 16.0 14.0 12.0 10.0 8.0 5.5 Rf
- 24. Finding the Required Return on Common Stock using the Capital Asset Pricing Model The Capital Asset Pricing Model (CAPM) can be used to estimate the required return on individual stocks. The formula: ( )RKRK fmjfj where jK = Required return on stock j fR = Risk-free rate of return (usually current rate on Treasury Bill). j = Beta coefficient for stock j represents risk of the stock mK = Return in market as measured by some proxy portfolio (index) Suppose that Baker has the following values: fR = 5.5% j = 1.0 mK = 12% .
- 25. CAPM/SML approach Advantage: Evaluates risk, applicable to firms that don’t pay dividends Disadvantage: Need to estimate Beta the risk premium (usually based on past data, not future projections) use an appropriate risk free rate of interest
- 26. Estimation of Beta Theoretically, the calculation of beta is straightforward: Problems 1. Betas may vary over time. 2. The sample size may be inadequate. 3. Betas are influenced by changing financial leverage and business risk. Solutions Problems 1 and 2 (above) can be moderated by more sophisticated statistical techniques. Problem 3 can be lessened by adjusting for changes in business and financial risk. Look at average beta estimates of comparable firms in the industry. 2 )( ),( M iM M Mi σ σ RVar RRCov β
- 27. Stability of Beta Most analysts argue that betas are generally stable for firms remaining in the same industry That’s not to say that a firm’s beta can’t change Changes in product line Changes in technology Deregulation Changes in financial leverage
- 28. What is the appropriate risk-free rate? Use the yield on a long-term bond if you are analyzing cash flows from a long-term investment For short-term investments, it is entirely appropriate to use the yield on short-term government securities Use the nominal risk-free rate if you discount nominal cash flows and real risk-free rate if you discount real cash flows
- 29. Weighted Average Cost of Capital (WACC) WACC weights the cost of equity and the cost of debt by the percentage of each used in a firm’s capital structure WACC=(E/ V) x KE + (D/ V) x KD x (1-TC) (E/V)= Equity % of total value (D/V)=Debt % of total value (1-Tc)=After-tax % or reciprocal of corp tax rate Tc. The after-tax rate must be considered because interest on corporate debt is deductible
- 30. WACC should be based on market rates and valuation, not on book values of debt or equity Book values may not reflect the current marketplace WACC will reflect what a firm needs to earn on a new investment. But the new investment should also reflect a risk level similar to the firm’s Beta used to calculate the firm’s RE. In the case of ABC Co., the relatively low WACC of 8.81% reflects ABC’s β=.74. A riskier investment should reflect a higher interest rate.
- 31. The WACC is not constant It changes in accordance with the risk of the company and with the floatation costs of new capital
- 32. Marginal cost of capital and investment projects 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Percent 10 15 19 5039 Amount of capital (Rs. millions) 11.23% 70 85 95 Marginal cost of capital Kmc A B C D E F G H 10.77% 10.41% - - - - - - - - -
- 33. Optimum Capital Structure The optimal (best) situation is associated with the minimum overall cost of capital: Optimum capital structure means the lowest WACC Usually occurs with 30-50% debt in a firm’s capital structure WACC is also referred to as the required rate of return or the discount rate
- 34. Optimal Capital Structure Cost (After-tax) Weights Weighted Cost Financial Plan A: Debt………………………… 6.5% 20% 1.3% Equity………………………. 12.0 80 9.6 10.9% Financial Plan B: Debt………………………… 7.0% 40% 2.8% Equity………………………. 12.5 60 7.5 10.3% Financial Plan C: Debt………………………… 9.0% 60% 5.4% Equity………………………. 15.0 40 6.0 11.4%
- 35. Cost of capital curve