Learning objectives of chapter 7: Understand some basic characteristics of the financial markets, understand how risk-free securities prices reflect risk-free borrowing rates, explain how corporate debt prices reflect higher interest rates when a borrower may default, explain investment risk;. | Chapter 7 TYPES AND COSTS OF FINANCIAL CAPITAL 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher CHAPTER 7: Learning Objectives Understand some basic characteristics of the financial markets Understand how risk-free securities prices reflect risk-free borrowing rates Explain how corporate debt prices reflect higher interest rates when a borrower may default Explain investment risk Estimate the cost of publicly traded equity capital (., exchange-listed common stocks) Estimate the cost of private equity capital Explain how capital costs combine into a weighted average cost of capital (WACC) Understand venture investors’ target returns and their relation to capital costs 2 Types & Costs of Financial Capital Implicit Versus Explicit Financial Capital Costs Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs However, no provision is made to record the less tangible expenses of equity | Chapter 7 TYPES AND COSTS OF FINANCIAL CAPITAL 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher CHAPTER 7: Learning Objectives Understand some basic characteristics of the financial markets Understand how risk-free securities prices reflect risk-free borrowing rates Explain how corporate debt prices reflect higher interest rates when a borrower may default Explain investment risk Estimate the cost of publicly traded equity capital (., exchange-listed common stocks) Estimate the cost of private equity capital Explain how capital costs combine into a weighted average cost of capital (WACC) Understand venture investors’ target returns and their relation to capital costs 2 Types & Costs of Financial Capital Implicit Versus Explicit Financial Capital Costs Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs However, no provision is made to record the less tangible expenses of equity capital (., required capital gains to complement the dividends) 3 Types & Costs of Financial Capital Explicit Cost A business expense that is easily identified and accounted for. Explicit costs represent clear, obvious cash outflows from a business that reduce its bottom-line profitability. . wage exp. Rent or lease costs. Implicit Cost A cost that is represented by lost opportunity in the use of a companys own resources, excluding cash. The implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain project or decision. . intangible costs . the time and effort that an owner puts into the maintenance of the company 4 Financial Markets Public Financial Markets: markets for the creation, sale and trade of liquid securities having standardized features Private Financial Markets: markets for the creation, sale and trade of illiquid securities having less standardized negotiated features 5 Determining Cost Of Debt Capital Interest Rate: .
