The document discusses the cost of capital and components used to calculate the weighted average cost of capital (WACC). It covers sources of long-term capital firms use, after-tax costs of different components, and whether the analysis should focus on historical or current marginal costs. The key points are:
1) Firms use long-term debt, preferred stock, common stock, retained earnings, and new common stock as sources of long-term capital.
2) WACC is calculated using the costs of each capital component weighted by the firm's target capital structure.
3) The analysis should focus on current marginal costs, like today's costs, for decisions involving raising new capital.
The document discusses the cost of capital and components used to calculate the weighted average cost of capital (WACC). It covers sources of long-term capital firms use, after-tax costs of different components, and whether the analysis should focus on historical or current marginal costs. The key points are:
1) Firms use long-term debt, preferred stock, common stock, retained earnings, and new common stock as sources of long-term capital.
2) WACC is calculated using the costs of each capital component weighted by the firm's target capital structure.
3) The analysis should focus on current marginal costs, like today's costs, for decisions involving raising new capital.
Investment Management Financial Market and InstitutionsDr. John V. Padua
This document provides an overview of financial markets and institutions. It defines key terms like financial system, markets, institutions and regulations. It describes the main components and functions of the financial system including borrowing/lending, price determination and risk sharing. It also outlines the major types of financial institutions like commercial banks, investment funds, insurance companies and their risk-reducing roles. Finally, it discusses reasons for financial regulation including increasing information transparency and ensuring system stability.
The document is an agenda and presentation slides for an EVM (Economic Value Management) teach-in at Swiss Re on March 31, 2008. The presentation introduces EVM methodology, figures, and compares EVM to embedded value. EVM is Swiss Re's integrated economic framework used for planning, pricing, reserving and managing the business. It separates underwriting and investment performance, recognizes profits at inception based on expected cash flows, and measures performance after capital costs. Sample EVM calculations and investment performance examples are provided to illustrate the methodology.
Southwest Airlines' mission is to provide high quality customer service with warmth, friendliness and company spirit. The airline was founded to take advantage of deregulation and provide low-cost intrastate service in Texas. Over time, Southwest expanded its routes and grew rapidly while maintaining low fares and a focus on customer satisfaction. The airline industry is highly competitive, with airlines competing on factors like fares, service, flight frequency and reacting quickly to competitors. The future holds both opportunities for Southwest to continue growing but also challenges from rising fuel costs and more competition.
This document provides an overview of capital budgeting techniques including net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), profitability index, and payback period. It discusses how to evaluate independent and mutually exclusive projects using NPV, IRR, and NPV profiles. It also covers assumptions around reinvestment rates for NPV versus IRR and how to calculate MIRR.
The document discusses capital structure and leverage. It defines operating leverage as using fixed costs which increases business risk when sales decline. Financial leverage is using debt which increases financial risk for stockholders. The optimal capital structure balances higher expected returns from debt against increased risk. Signaling theory suggests firms should use less debt than predicted to avoid signaling effects from stock sales that could lower stock prices.
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.
The document discusses capital structure, which is the mix of debt and equity used to finance a firm. The value of a firm is equal to the value of its debt plus the value of its equity. The optimal capital structure maximizes firm value by balancing the debt-equity ratio. Factors that influence the capital structure decision include business risk, taxes, financial flexibility, growth opportunities, and market conditions. Leverage increases risk for shareholders but also increases potential returns, as interest payments are tax deductible. Higher debt leads to greater financial risk.
The document summarizes key concepts from chapters 6-14 of a finance textbook on risk and return, time value of money, bonds, stock and their valuation, cost of capital, capital budgeting, and cash flow estimation. It defines terms like expected rate of return, risk measures like standard deviation and beta, bond and stock valuation models, weighted average cost of capital, net present value, internal rate of return, modified internal rate of return, and cash flow terms like operating cash flow, free cash flow, EBIT, and more. Formulas and calculator instructions are provided for computing many of these concepts.
This document summarizes key concepts from chapters 6-13 of a finance textbook on risk and return, bonds, stocks, and capital budgeting. It defines rate of return, expected rate of return, risk/standard deviation, beta coefficient, correlation, security market line, time value of money, yield to maturity, dividend discount model for stocks, weighted average cost of capital (WACC), net present value (NPV), internal rate of return (IRR), and modified IRR (MIRR). Formulas are provided for calculating these concepts.
The document summarizes key concepts from chapters 6-14 of a finance textbook on risk and return, time value of money, bonds, stock and their valuation, cost of capital, capital budgeting, and cash flow estimation. It defines terms like expected rate of return, risk measures like standard deviation and beta, bond and stock valuation models, weighted average cost of capital, net present value, internal rate of return, modified internal rate of return, and cash flow terms like operating cash flow, free cash flow, EBIT, and more. Formulas and calculator instructions are provided for computing many of these concepts.
The document summarizes key concepts from chapters 6-14 of a finance textbook on risk and return, time value of money, bonds, stock and their valuation, cost of capital, capital budgeting, and cash flow estimation. It defines terms like expected rate of return, risk measures like standard deviation and beta, bond and stock valuation models, weighted average cost of capital (WACC), net present value (NPV), internal rate of return (IRR), modified IRR, free cash flow, and operating cash flow. Formulas for concepts like time value of money, yield to maturity, dividend discount model, security market line, and cost of debt are also presented.
The document summarizes key concepts from chapters 6-14 of a finance textbook relating to risk and return, time value of money, bonds, stock valuation, cost of capital, capital budgeting, and cash flow estimation. It defines terms like expected rate of return, risk measures like standard deviation and beta, bond and stock valuation methods, weighted average cost of capital (WACC), net present value (NPV), internal rate of return (IRR), modified IRR, payback period, and cash flow items like net operating working capital, operating cash flow, and free cash flow. Formulas and calculator instructions are provided for computing many of these concepts.
11. Value MM Actual Value of firm เมื่อไม่ใช้หนี้ Value added by debt tax Value reduced by bankruptcy cost Leverage
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14. Value of firm Cost of capital Stock price EPS Cost of equity After tax Cost of debt WACC Percent financed of debt Percent financed of debt Percent financed of debt
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