internatinalfinancemanagement【國(guó)際財(cái)務(wù)管理】lecture5costofcapital(已修改)
2025-10-23 16:13 本頁(yè)面
【正文】 Lecture 5 Cost of Capital Learning Objectives ? Learning Objectives – Estimate the cost of capital – Distinguish among the cost of capital, the required return to equity, the required return to debt – Chapters covered: Chapter 12 Invest in project The Cost of Equity Capital Firm with excess cash Shareholder’s Terminal Value Pay cash dividend Shareholder invests in financial asset Because stockholders can reinvest the dividend in risky financial assets, the expected return on a capitalbudgeting project should be at least as great as the expected return on a financial asset of parable risk. A firm with excess cash can either pay a dividend or make a capital investment Cost of Capital ? Definition :the cost of capital is the required return for a capital budgeting project. It is an opportunity cost, it is the return at which investors would provide financing for the capital budgeting projects. The use of cost of capital ? Using the cost of capital as hurdle rate to pute NPV of a project ? Using the cost of capital as the benchmark for performance measurement ? Using the cost of capital of entire firm to calculate the value of the firm, which can be used to estimate the true value of the firm, in case of repurchase or take over The cost of capital for a safe project ? A project whose cash flow is fixed in real terms current nominal yield on . government bond is 5%, CPI is 2%, we can say the cost of capital for this project in real terms is about 3% This is the appropriate rate for project with given cash flow Cost of capital for risky asset ? What is the required rate of return for projects whose future cash flow is uncertain ? Need a hurdle rate patible to its risk ? The hurdle rate is the rate of return on the asset at which the project merely return enough cash flow(including tax shield on the debt) to pay the shareholder and debtholder the required rate of return WACC ? Consider a project which generates pretax cash flow CF, interest rate is I, the project is financed with debt and equity at market value D and E, tax rate is T ? The weighted average cost of capital is ? One could use WACC as the discount rate to value a firm ,but WACC assumes the D/D+E ratio(target debt ratio) will remain constant in the future )())(1( ED ErED DTrW A C C ed ?????WACC ? To estimate WACC, we need – The required return on equity – The require
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