Chapter 15 explain the cost of capital and taxation issues in project evaluation. This chapter include objectives: Understand the concept of the cost of capital, understand the effect of risk on the cost of capital, understand how the cost of capital can be measured under the imputation tax system, understand why the cost of capital for a company is expressed as a weighted average of the costs of all of the company’s sources of capital,. | Chapter 15 The Cost of Capital and Taxation Issues in Project Evaluation 2 2 2 2 2 2 2 2 2 Learning Objectives Understand the concept of the cost of capital. Understand the effect of risk on the cost of capital. Understand how the cost of capital can be measured under the imputation tax system. Understand why the cost of capital for a company is expressed as a weighted average of the costs of all of the company’s sources of capital. 2 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Estimate the cost of each source of capital and combine these costs into a weighted average cost of capital for a company. Explain how to treat issue costs in project evaluation. Understand the distinction between the cost of capital for a project and a company’s weighted average cost of capital. Estimate the cost of capital for a division of a diversified company. 4 4 4 4 4 4 4 4 4 Learning Objectives (cont.) Understand the advantages and disadvantages of using the weighted average cost of capital in . | Chapter 15 The Cost of Capital and Taxation Issues in Project Evaluation 2 2 2 2 2 2 2 2 2 Learning Objectives Understand the concept of the cost of capital. Understand the effect of risk on the cost of capital. Understand how the cost of capital can be measured under the imputation tax system. Understand why the cost of capital for a company is expressed as a weighted average of the costs of all of the company’s sources of capital. 2 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Estimate the cost of each source of capital and combine these costs into a weighted average cost of capital for a company. Explain how to treat issue costs in project evaluation. Understand the distinction between the cost of capital for a project and a company’s weighted average cost of capital. Estimate the cost of capital for a division of a diversified company. 4 4 4 4 4 4 4 4 4 Learning Objectives (cont.) Understand the advantages and disadvantages of using the weighted average cost of capital in project evaluation. Understand the effects of taxes on project cash flows. Understand the application of the certainty equivalent method of incorporating risk into project evaluation. 5 5 5 5 5 5 5 5 5 Net Present Value Analysis Calculation requires: Net cash flows. Required rate of return/cost of capital. Consistency in the definition of cash flows and the discount rate applied to the cash flows. Required rate of return = opportunity cost. Opportunity cost of capital: rate of return that could be earned on another investment of similar risk. 6 6 6 6 6 6 6 6 6 Cost of Capital Minimum rate of return needed to compensate suppliers of capital for committing resources to an investment. The cost of capital is very important, accept or reject decision of project can change with small changes in cost of capital. There are various ways to think about cost of capital but the key is consistency between cash flows and cost of capital in NPV calculation. 7 7 7 7 7 7 7 7 7 Risk, Return and the .
