(BQ) Part 2 book "Fundamentals of financial management" has contents: Investing in long term assets - capital budgeting; capital structure and dividend policy; working capital management and financial forecasting; special topics in financial management. | PART 4 CHAPTER INVESTING IN LONG-TERM ASSETS: CAPITAL BUDGETING 10 The Cost of Capital 11 The Basics of Capital Budgeting 12 Cash Flow Estimation and Risk Analysis 13 Real Options and Other Topics in Capital Budgeting ª STAN HONDA/AFP/GETTY IMAGES 10 The Cost of Capital General Electric CHAPTER Creating Value at GE General Electric (GE) is one of the world’s bestmanaged companies, and it has rewarded its shareholders with outstanding returns. GE creates shareholder value by investing in assets that earn more than the cost of the capital used to acquire them. For example, if a project earns 20% but the capital invested in it costs only 10%, taking on the project will increase the firm’s value and thus its stock price. Capital is obtained in three primary forms: debt, preferred stock, and common equity, with equity acquired by retaining earnings and by the issuance of new stock. The investors who provide capital to GE expect to earn at least their required rate of return on that capital, and the required return represents the firm’s cost of A variety of factors influence the cost of capital. Some—including interest rates, state 1 and federal tax policies, and general economic conditions—are outside the firm’s control. However, the firm’s decisions regarding how it raises capital and how it invests those funds also have a profound effect on its cost of capital. Estimating the cost of capital for a company such as GE is conceptually straightforward. GE’s capital comes largely from debt plus common equity obtained by retaining earnings, so its cost of capital depends largely on the level of interest rates in the economy and the marginal stockholder’s required rate of return on equity. However, GE operates many different divisions throughout the world; so the corporation is similar to a portfolio that contains a number of different stocks, each with a different risk. Recall that portfolio risk is a weighted average of the relevant risks of the .
