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Copyright 
 
© 2008 by The McGraw-Hill Companies, Inc. All rights reserved 
.
 McGraw-Hill/Irwin
1
Chapter 12
Cost of Capital
 
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12-2
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Chapter Outline
•The Cost of Capital: Some Preliminaries•The Cost of Equity•The Costs of Debt and Preferred Stock•The Weighted Average Cost of Capital•Divisional and Project Costs of Capital
 
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Why Cost of Capital Is Important?
•Capital budgeting•r = interest rate, discount rate, required return,cost of capital, opportunity cost•The required return on asset depends on the riskof the asset•How much return required by investor = cost tothe company•How to calculate the cost of capital (r)? –
Where the capital being raised
 –
Return required by capital suppliers
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