Professional Documents
Culture Documents
Cost of Capital
Cost of Capital
Accounting Principles
• Method of Valuation
• Cost Calculation
Accounting Principles
• Method of Valuation
• Asset Based Approach
• Earning Value Approach
• Market Value Approach
• Cost Calculation
Method of Valuation
• Asset Based Approach
• Going Concern Approach
• Liquidation Approach
• Method of Valuation
• Cost Calculation
• Cost of Capital
• Weighted Average Cost of Capital
• Can we maximise shareholders wealth by varying
the proportions of debt and equity in a company’s
capital make up?
Capital Structure
• Debt : Equity
• Debt to Equity Ratio
• Debt to Capital Ratio
• Low Leverage
• High Leverage
Imagine a business with the following financial information:
• $50 million of assets
• $20 million of debt
• $25 million of equity
• $5 million of annual EBITDA
• $2 million of annual depreciation expense
• Now calculate each of the 4 ratios outlined above as follows:
• Debt/Assets
• Debt/Equity
• Debt/Capital
• Debt/EBITDA
Capital Structure
Equity Debt
• Preferred Stock • Long Term Debt
• Common Stock • Short Term Debt
• Retained Earnings
Problem #1
At the end of its prior fiscal year, December 31, M Company has assets of
$300,000 and liabilities of $175,000.
Required:
H Company reported the following information for the year. During the year, an
additional $25,000 of capital stock was issued and no dividends were paid.
Required:
Determine the net income/net loss for the year.
Problem #3
T Company’s balance sheet reported the following total assets and total liabilities
for the year. During the year, an additional $70,000 of capital stock was issued
and $45,000 of dividends were paid.
Total Assets Total Liabilities
Beginning of the year $625,000 $255,000
End of the year $640,000 $385,000
Required:
Determine the net income/net loss for the year.
Cost Calculation
• Cost of Capital
• Financing Cost
• Opportunity Cost
Project 1 Project 2
• Cost=100,000 • Cost=100,000
• Life=20 years • Life=20 years
• Rate of Return=7% • Rate of Return=12%
• Cost of debt financing • Cost of equity financing
available=6% available=14%
Strategic Objectives of an Organization
• Financial Objectives
• Value of Money
• Measurement of value of Currency
• Present Value of Money
• Future Value of Money
• Maximizing Shareholder’s Wealth
Value of Money
• Measurement of Value f Money
• Exchange Rate
• Treasury Notes
• Foreign Exchange Reserves
Value of Money
• Present Value of Money
• PV = FV (1 + r) n • FV = Future value of money
• PV = Present value of money
• i = interest rate
• n = number of compounding periods per year
• t = number of years
• FV = PV (1 + r)
• FV = Future value of money
• PV = Present value of money
• i = interest rate
• n = number of compounding periods per year
• t = number of years