Week Four Discussion Questions
1.What is the cost of capital? How do you calculate the cost of capital? Why is it important in capital budgeting decisions. (due by midnight on Thursday)
Cost of capital is the required return or the opportunity cost for a project in order to increase the value of the firm in the market place. It helps managers evaluate if an investment is worthwhile by setting a benchmark for the minimum rate of return. Cost of capital may be used as the measuring road for adopting an investment proposal. It measures the financial performance and determines the acceptability of all investment opportunities. The weighted average cost of capital (WACC) is used to measure a firm’s cost of capital.
2. What are some capital budgeting tools? Explain Net Present Value (NPV) analysis. (Due by midnight on Thursday)
Different tools used in capital budgeting include NPV, discounted-cash-flow analysis, IRR, and MIRR. NPV is used to evaluate capital budgeting projects by determining the difference between the market value of an item and what it costs.
3. What is the weighted average cost of capital (WACC)? How is it calculated? What are business investment rules? (Due by midnight on Saturday)
WACC is the average costs of financing sources either debt or equity. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing. WACC= E/V*Re+D/V*Rd*(1-Tc)
Re=cost of equity, Rd=cost of debt, E=market value of the firm’s equity, D=market value of the firm’s debt, V=E+D, E/V=percentage of financing that is equity, D/V=percentage of financing that is debt, Tc =corporate tax rate. Business investment rules include NPV, discounted-cash-flow analysis, payback method, IRR, net cash flow after taxes and MIRR.
4. How is risk factored into capital budgeting? (Due by midnight on Saturday).
Organizations face many