LEARNING GOALS

468

THE COST

OF CAPITAL

CHAPTER

Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU

Accounting:You need to understand the various sources of
capital and how their costs are calculated in order to provide
data used in determining the firm’s overall cost of capital.

Information systems:You need to understand the various
sources of capital and how their costs are calculated in order
to develop systems that will estimate the costs of those
sources of capital, as well as the overall cost of capital.

Management:You need to understand the cost of capital in
order to assess the acceptability and relative rankings of
proposed long-term investments.

Marketing:You need to understand what the firm’s cost

of capital is because proposed projects will face rejection

if their promised returns are less than the firm’s cost of

capital.

Operations:You need to understand the cost of capital in

order to assess the economic viability of investments in

plant and equipment needed to improve or expand the firm’s

capacity.

Calculate the weighted average cost of capital

(WACC) and discuss the alternative weighting

schemes.

Describe the procedures used to determine

break points and the weighted marginal cost of

capital (WMCC).

Explain how the weighted marginal cost of capi-

tal (WMCC) can be used with the investment

opportunities schedule (IOS) to make the firm’s

financing/investment decisions.

LG6

LG5

Understand the key assumptions that underlie LG4

cost of capital, the basic concept of cost of

capital, and the specific sources of capital that

it includes.

Determine the cost of long-term debt and the cost

of preferred stock.

Calculate the cost of common stock equity

and convert it into the cost of retained earnings

and the cost of new issues of common

stock.

LG3

LG2

LG1

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