(BQ) Part 2 book "Fundamentals of corporate finance" has contents: Introduction to corporate financing, how corporations raise venture capital and issue securities, risk management, international financial management, working capital management, payout polic,.and other contents. | CHAPTER 13 The WeightedAverage Cost of Capital and Company Valuation LEARNING OBJECTIVES After studying this chapter, you should be able to: 13-1 Calculate a firm’s capital structure. 13-2 Estimate the required rates of return on the securities issued by the firm. 13-3 Calculate the weighted-average cost of capital. 13-4 Understand when the weighted-average cost of capital is—or isn’t—the appropriate discount rate for a new project. 13-5 Use the weighted-average cost of capital to value a business given forecasts of its future cash flows. R E L AT E D W E B S I T E S F O R T H I S C H A P T E R CA N B E F O U N D I N C O N N E C T F I N A N C E . 386 Risk PA R T T H R E E Geothermal Corporation was founded to produce electricity from geothermal energy trapped under the earth. How should Geothermal determine its cost of capital? I n the previous chapter you learned how to use cost of capital is usually calculated as a weighted the capital asset pricing model to estimate the average of the after-tax cost of debt interest and the expected return on a company’s common stock. “cost of equity,” that is, the expected rate of return on If the firm is financed wholly by common stock, then the firm’s common stock. The weights are the frac- the stockholders own all the firm’s assets and are tions of debt and equity in the firm’s capital structure. entitled to all the cash flows. In this case, the return Managers refer to the firm’s weighted-average cost of required by investors in the common stock equals the capital, or WACC (rhymes with “quack”). company cost of capital. Managers use the weighted-average cost of capi- Most companies, however, are financed by a mix- tal to evaluate average-risk investment projects. “Aver- ture of securities, including common stock, bonds, age risk” means that the project’s risk matches the preferred stock, or other securities. Each of these risk of the firm’s .
