ch 14 cost of capital

Question 1

why cost of capital is important

Answer 1

• return earned on assets depends on the risk of those assets
• the return to an investor is the same as the cost to the company
• our cost of capital provies us with an indication of how the market views the risk of our assets
• knowing our cost of capital can also help us determine our required return for capital budgeting projects

Question 2

cost of equity

Answer 2

the return required by equity investors given the risk of the cash flows from the firm
- dividend growth model
- SML or CAPM

Question 3

costs of debt

Answer 3

the required return on the company’s debt