1
/
of
1
Richard Malekian
Cost of Capital Tutorial
Cost of Capital Tutorial
Regular price
$6.99 USD
Regular price
Sale price
$6.99 USD
Shipping calculated at checkout.
Quantity
Couldn't load pickup availability
The goal of this tutorial is to give the reader a thorough understanding of one of the most important, and least understood, concepts in corporate finance - the cost of capital. While the cost of capital can be considered a fundamental building block of corporate finance, it is frequently ignored by many companies as they go about their day to day operations. However, by ignoring the cost of capital, companies run the risk of misallocating capital and therefore destroying rather than creating shareholder value. This tutorial will give the reader the tools necessary to determine what debt and equity capital costs so that a proper comparison can be made between a company’s cost of capital, and the return a company is actually earning on that invested capital.
Learning Objectives
The first part of the tutorial will be devoted to acquainting the reader with the cost of debt capital. The risk/return nature of debt capital will be discussed, as well as the tax benefits to be derived from the use of debt as a financing tool. In addition, financing instruments such as leases that really represent a form of debt will also be addressed.
This cost of debt discussion will be followed by an introduction to the cost of equity capital. In this section, we will address the development of the Capital Asset Pricing Model and explain how this model is used to determine the appropriate cost of equity capital. As part of understanding the Capital Asset Pricing Model, the reader will be introduced to concepts such as the risk-free rate of return, the market risk premium, and beta coefficients (both levered and unlevered).
This section will be followed by a discussion of the weighted average cost of capital. The reader will be shown how to properly weight a company’s cost of debt capital and its cost of equity capital so that a single, blended cost of capital rate can be created. In that regard, the reader will learn how to use two different, but equivalent, methodologies for calculating the weighted average cost of capital.
Finally, common pitfalls in the use of cost of capital will be presented and discussed so that the reader will understand how those pitfalls can be avoided.
Learning Objectives
The first part of the tutorial will be devoted to acquainting the reader with the cost of debt capital. The risk/return nature of debt capital will be discussed, as well as the tax benefits to be derived from the use of debt as a financing tool. In addition, financing instruments such as leases that really represent a form of debt will also be addressed.
This cost of debt discussion will be followed by an introduction to the cost of equity capital. In this section, we will address the development of the Capital Asset Pricing Model and explain how this model is used to determine the appropriate cost of equity capital. As part of understanding the Capital Asset Pricing Model, the reader will be introduced to concepts such as the risk-free rate of return, the market risk premium, and beta coefficients (both levered and unlevered).
This section will be followed by a discussion of the weighted average cost of capital. The reader will be shown how to properly weight a company’s cost of debt capital and its cost of equity capital so that a single, blended cost of capital rate can be created. In that regard, the reader will learn how to use two different, but equivalent, methodologies for calculating the weighted average cost of capital.
Finally, common pitfalls in the use of cost of capital will be presented and discussed so that the reader will understand how those pitfalls can be avoided.
Share
