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Capital Budgeting & Cost of Capital (Cost%2Bof%2BCapital.ppt)

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Capital BudgetingDefine the capital budgeting process, explain the administrative steps of the process, and categorize the capital projects which can be evaluated.Summarize and explain the principles of capital budgeting, including the choice of the proper cash flows and the identification of the proper discount rate.Explain how the following project interactions affect the evaluation of a capital project: (1) independent versus mutually exclusive projects, (2) project sequencing, and (3) unlimited funds versus capital rationing.Calculate and interpret the results produced from each of the following methods when evaluating a single capital project: net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, average accounting rate of return (ARR), and profitability index (PI).Explain the NPV profile, compare and contrast the NPV and IRR methods when evaluating more than one capital project, and describe the multiple IRR and no-IRR problems that can arise when calculating an IRR.Describe the relative popularity of the various capital budgeting methods and explain the importance of the NPV in estimating the value of a stock price.Cost of CapitalDetermine and interpret the weighted average cost of capital (WACC) of a company, and explain the adjustments to it that an analyst should make in developing a cost of capital for a specific project.Describe the role of taxes in the cost of capital from the difference capital sources.Describe alternative methods of calculating the weights used in the weighted average cost of capital, including the use of the company’s target capital structure.Explain the analyst’s concern with the marginal cost of capital in evaluating investment projects, and explain the use of marginal cost of capital and the investment opportunity schedule in determining the optimal capital budget for a company.Explain the marginal cost of capital’s role in determining the net present value of a project.Calculate and analyze the cost of fixed rate debt capital using the yield-to-maturity approach and the debt-rating approach.Calculate the cost of nonconvertible preferred stock.Calculate and analyze the cost of equity capital using the capital asset pricing model approach, the dividend discount approach, and the bond yield plus risk premium approach.

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Natalia Elizabeth Rendon Chasi

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Creative Commons -