(BQ) Part 2 book "Corporate finance - Core principles & applications" has contents: Efficient capital markets and behavioral challenges; capital structure - basic concepts; capital structure - limits to the use, dividends and other payouts, options and corporate finance,.and other contents. | Find more at Risk, Cost of Capital, and Capital Budgeting CHAPTER 12 OPENING CASE W ith over 95,000 employees on five continents, Germany-based BASF is a major international company. It operates in a variety of industries, including agriculture, oil and gas, chemicals, and plastics. In an attempt to increase value, BASF launched BASF 2015, a comprehensive plan that included all functions within the company and challenged and encouraged all employees to act in an entre- preneurial manner. The major financial component of the strategy was that the company expected to earn its weighted average cost of capital, or WACC, plus a premium. So, what exactly is the WACC? The WACC is the minimum return a company needs to earn to satisfy all of its investors, including stockholders, bondholders, and preferred stockholders. In 2010, for example, BASF pegged its WACC at 9 percent, the same number it had used in 2009. This was in contrast to 2008 when the company had estimated its WACC at 10 percent. In this chapter, we learn how to compute a firm’s cost of capital and find out what it means to the firm and its investors. We will also learn when to use the firm’s cost of capital, and, perhaps more important, when not to use it. The goal of this chapter is to determine the rate at which cash flows of risky projects are to be discounted. Projects are financed with equity, debt, and other sources, and we must estimate the cost of each of these sources in order to determine the appropriate discount rate. We begin with the cost of equity capital. Since the analysis here builds on beta and the capital asset pricing model (CAPM), we discuss beta in depth, including its calculation, its intuition, and its determinants. We next discuss the cost of debt and the cost of preferred stock. These costs serve as building blocks for the weighted average cost of capital (WACC), which is used to discount cash flows. We calculate the WACC for a real-world company, .
