Cost of Capital - Business Finance - ثاني ثانوي

8 Cost of Capital ? How are investment decisions of managers different from those of individuals? People in leadership positions in firms have to make decisions about how their company invests its money. قرارة التي

LEARNING OBJECTIVES Once you have completed this chapter, you should be able to: 1 Identify the components of a company's capital structure Describe factors that affect the cost of 2 debt, the cost of preferred stock, 3 and the cost of common stock. Calculate the weighted average cost of capital. 4 5 Determine the optimal capital structure of a company. Describe the characteristics of all debt Instruments. 317

. FIGURE 8.7 The Financial Market Environment 3118Business Finance he process for making investment decisions by the financial manager of a company is similar to you selecting a personal stock investment. They either compare the present value of future cash inflows with the current cost of the investment or they compare the investment's expected return with the required return. Investing in equipment, a building, or other capital item requires an estimate of the cost of funds to finance the purchase of the asset. That amount is referred to as the cost of capital and depends on the cost of the various sources of funds. A firm may borrow from a variety of sources and may issue preferred and common stock to raise funds. As shown in Figure 8.1, the financial market environment brings together providers and users of capital funds for the purpose of obtaining financing for company business activities. Lenders and stockholders expect to earn a return for the funds they provide. Creditors require interest payments, and stockholders want dividends and price appreciation. All sources of funds have a cost, so the question becomes: What is the best combination of debt and equity financing that minimizes the firm's cost of capital? That combination is called the firm's optimal capital structure. PROVIDERS OF FLINTS Lalary, In FINANCIAL INTERMEDIARIES interes FINANCIAL MARKET USERE OF UNDS Slower THE

This chapter is concerned with the determination of the cost of capital and the firm's optimal capital structure. Companies use cost of capital to select various competing uses for the firm's capital. This chapter begins with the costs of the various components in the firm's capital structure. This is followed by a discussion of the weighted cost of capital and the determination of the optimal capital structure. Once this capital structure has been determined, it should be maintained, as it generates the lowest cost of funds while maximizing the stock value of the company. What process does the financial maname LA for making investment decisions? Jan 310