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1、LEARNINGOBJECTIVESAfterstudyingthischapter,youshouldunderstand:LO1Howtodeterminea?rm’scostofequitycapital.COSTOFCAPITALLO2Howtodeterminea?rm’scostofdebt.LO3Howtodeterminea?rm’soverallcostofcapital.14LO4Howtocorrectlyinclude?otationcostsincapitalbudgetingprojects.LO5Some
2、ofthepitfallsassociatedwitha?rm’soverallcostofcapitalandwhattodoaboutthem.WITHOVER95,000EMPLOYEESONFIVEcapital,orWACC,plusapremium.So,whatexactlyisCONTINENTS,Germany-basedBASFisamajortheWACC?internationalcompany.ThecompanyoperatesinaTheWACCistheminimumreturnacompanyneed
3、svarietyofindustries,includingagriculture,oilandgas,toearntosatisfyallofitsinvestors,includingstockhold-chemicals,andplastics.Inanattempttoincreaseers,bondholders,andpreferredstockholders.In2007,value,BASFlaunchedBASF2015,acomprehensiveforexample,BASFpeggeditsWACCat9per
4、cent,andplanthatincludedallfunctionswithinthecompanyitincreasedthis?gureto10percentin2008.Inthisandchallengedandencouragedallemployeestoactchapter,welearnhowtocomputea?rm’scostofcapitalinanentrepreneurialmanner.Themajor?nancialand?ndoutwhatitmeanstothe?rmanditsinvestors
5、.componentofthestrategywasthatthecompanyWewillalsolearnwhentousethe?rm’scostofcapital,expectedtoearnitsweightedaveragecostofand,perhapsmoreimportant,whennottouseit.Mastertheabilitytosolveproblemsinthischapterbyusingaspreadsheet.AccessExcelMasteronthestudentWebsitewww.mh
6、he.com/rwj.Supposeyouhavejustbecomethepresidentofalargecom-pany,andthe?rstdecisionyoufaceiswhethertogoaheadwithaplantorenovatethecompany’swarehousedistributionsystem.Theplanwillcostthecompany$50million,anditisexpectedtosave$12millionperyearaftertaxesoverthenextsixyears.
7、Thisisafamiliarproblemincapitalbudgeting.Toaddressit,youwoulddeterminetherelevantcash?ows,discountthem,and,ifthenetpresentvalueispositive,takeontheproject;iftheNPVisnegative,youwouldscrapit.Sofar,sogood;butwhatshouldyouuseasthediscountrate?Fromourdiscussionofriskandretu
8、rn,youknowthatthecorrectdiscountratedependsontheriskinessoftheprojecttorenovatethewarehousedistributionsystem.
