Boundless Lecture Slides
Available on the Boundless Teaching Platform
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless Teaching
Platform
Boundless empowers educators to engage their students
with affordable, customizable textbooks and intuitive
teaching tools. The free Boundless Teaching Platform
gives educators the ability to customize textbooks in
more than 20 subjects that align to hundreds of popular
titles. Get started by using high quality Boundless books,
or make switching to our platform easier by building from
Boundless content pre-organized to match the assigned
textbook. This platform gives educators the tools they
need to assign readings and assessments, monitor
student activity, and lead their classes with pre-made
teaching resources.
Using Boundless Presentations
The Appendix
The appendix is for you to use to add depth and
breadth to your lectures. You can simply drag and
drop slides from the appendix into the main
presentation to make for a richer lecture
experience.
Get started now at:
http://boundless.com/teaching-platform
Free to edit, share, and copy
Feel free to edit, share, and make as many copies
of the Boundless presentations as you like. We
encourage you to take these presentations and
make them your own.
If you have any questions or problems please email:
educators@boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
About Boundless
Boundless is an innovative technology company making education more affordable and
accessible for students everywhere. The company creates the world’s best open educational
content in 20+ subjects that align to more than 1,000 popular college textbooks. Boundless
integrates learning technology into all its premium books to help students study more efficiently
at a fraction of the cost of traditional textbooks. The company also empowers educators to
engage their students more effectively through customizable books and intuitive teaching tools
as part of the Boundless Teaching Platform. More than 2 million learners access Boundless free
and premium content each month across the company’s wide distribution platforms, including its
website, iOS apps, Kindle books, and iBooks. To get started learning or teaching with
Boundless, visit boundless.com.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Introduction to the Cost of Capital > The Basics of the Cost of Capital
The Basics of the Cost of Capital
• Defining the Cost of Capital
• Differences Between Required Return and the Cost of Capital
• Relationship Between Financial Policy and the Cost of Capital
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance?campaign_content=book_192_section_87&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir
ect&utm_source=boundless
Introduction to the Cost of Capital > The Basics of the Cost of Capital
Defining the Cost of Capital
• If a project is of similar risk to a company's average business activities, it is
reasonable to use the company's average cost of capital as a basis for project
evaluation.
• A company's securities typically include both debt and equity; therefore, one must
calculate both the cost of debt and the cost of equity to determine a company's
cost of capital.
• Weighted average cost of capital takes into account the amount of financing that
comes through the use of debt and the use of equity.
• IRR is the rate of return that makes the net present value of all cash flows from an
investment equal zero.
Net Present Value Equation
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-basics-of-the-cost-of-capital87/defining-the-cost-of-capital-372-
Introduction to the Cost of Capital > The Basics of the Cost of Capital
Differences Between Required Return and the Cost of Capital
• Cost of capital refers to the expected returns on all of the various securities issued
by a company, often expressed as a weighted average.
• Required refers to the rate of return necessary to achieve in order to compensate
investors for taking on the risk of the individual investment.
• The risk premium can be established by understanding business risk and financial
risk.
Obtaining Required Return
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-basics-of-the-cost-of-capital87/differences-between-required-return-and-the-cost-of-capital-373-
Introduction to the Cost of Capital > The Basics of the Cost of Capital
Relationship Between Financial Policy and the Cost of Capital
• As opposed to strictly using cost of capital, decisions must be made using
opportunity cost of capital.
• Opportunity cost of capital is the amount of money foregone by investing in one
asset compared to another.
• Facets of financial policy include valuation, portfolio theory, hedging, and capital
structure.
Oil Prices
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-basics-of-the-cost-of-capital87/relationship-between-financial-policy-and-the-cost-of-capital-374-
Appendix
Free to share, print, make copies and changes. Get yours at www.boundless.com
Introduction to the Cost of Capital
Key terms
• benchmark A standard by which something is evaluated or measured.
• capital Money and wealth; the means to acquire goods and services, especially in a non-barter system.
• capital Money and wealth; the means to acquire goods and services, especially in a non-barter system.
• leverage The use of borrowed funds with a contractually determined return to increase the ability of a business to invest and
earn an expected higher return (usually at high risk).
• Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
• required return the minimum gain expected by investors
Free to share, print, make copies and changes. Get yours at www.boundless.com
Introduction to the Cost of Capital
Net Present Value Equation
Equation used to determine net present value, and therefore internal rate of return. DPV = discounted net present value, N = total number of periods in
which a cash flow occurs, t = the specific period of the cash flow, FV = the value of the future cash flow, and i = internal rate of return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Discounted cash flow." GNU FDL http://en.wikipedia.org/wiki/Discounted_cash_flow View on Boundless.com
Introduction to the Cost of Capital
Oil Prices
Companies often use hedging techniques to offset price fluctuations for commodities. The fluctuation of oil prices can be seen in the above graph.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Oil.2001-2005jpg.smaller." CC BY-SA http://commons.wikimedia.org/wiki/File:Oil.2001-2005jpg.smaller.jpg View on Boundless.com
Introduction to the Cost of Capital
Obtaining Required Return
The capital asset pricing model is a good representation of how to obtain required return. It adds the risk-free rate to the risk premium of the market
adjusted to an investment's beta.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Capital asset pricing model." GNU FDL http://en.wikipedia.org/wiki/Capital_asset_pricing_model View on Boundless.com
Introduction to the Cost of Capital
IRR Investment Comparison
A graph showing the decision between two exclusive investments based on IRR.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
Introduction to the Cost of Capital
The average cost of capital is:
A) fixed through time
B) the same for all companies
C) a benchmark for accepting or rejecting projects.
D) all of these
Free to share, print, make copies and changes. Get yours at www.boundless.com
Introduction to the Cost of Capital
The average cost of capital is:
A) fixed through time
B) the same for all companies
C) a benchmark for accepting or rejecting projects.
D) all of these
Free to share, print, make copies and changes. Get yours at www.boundless.com
Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/
Introduction to the Cost of Capital
Which of the following explains the differences between a
company's required return and its cost of capital?
A) Required return measures business risk; cost of capital measures
financial risk.
B) Required return measures financial risk; cost of capital measures
business risk.
C) Required return is from the investor's perspective; cost of capital from
the company's.
D) Required return is from the company's perspective; cost of capital
from the investor's.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Introduction to the Cost of Capital
Which of the following explains the differences between a
company's required return and its cost of capital?
A) Required return measures business risk; cost of capital measures
financial risk.
B) Required return measures financial risk; cost of capital measures
business risk.
C) Required return is from the investor's perspective; cost of capital from
the company's.
D) Required return is from the company's perspective; cost of capital
from the investor's.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Introduction to the Cost of Capital
A company's cost of capital is used as a tool in relation to which
aspect of financial policy?
A) Diversifying a company's porfolio
B) Hedging a company's investments.
C) Evaluating a company's capital structure.
D) Valuing projects by discounting cash flows, and then selecting projects
with the highest return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Introduction to the Cost of Capital
A company's cost of capital is used as a tool in relation to which
aspect of financial policy?
A) Diversifying a company's porfolio
B) Hedging a company's investments.
C) Evaluating a company's capital structure.
D) Valuing projects by discounting cash flows, and then selecting projects
with the highest return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Introduction to the Cost of Capital
Attribution
• OER Commons. CC BY http://www.oercommons.org/courses/15-414-financial-management-summer-2003/view
• Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capital
• OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/view
• Wikipedia. "Required rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Required_rate_of_return
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Wiktionary. "capital." CC BY-SA 3.0 http://en.wiktionary.org/wiki/capital
• Wikipedia. "Portfolio theory." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Portfolio_theory
• Wikipedia. "Managerial finance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Managerial_finance
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/Opportunity Cost." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/Opportunity_Cost
• Wikipedia. "Hedge (finance) - Wikipedia, the free encyclopedia." CC BY-SA 3.0
http://en.wikipedia.org/w/index.php?title=Hedge_(finance)&printable=yes
• Wikipedia. "Capital structure - Wikipedia, the free encyclopedia." CC BY-SA 3.0
http://en.wikipedia.org/w/index.php?title=Capital_structure&printable=yes
• Wiktionary. "leverage." CC BY-SA 3.0 http://en.wiktionary.org/wiki/leverage
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capital
• Wiktionary. "benchmark." CC BY-SA 3.0 http://en.wiktionary.org/wiki/benchmark
• Wiktionary. "capital." CC BY-SA 3.0 http://en.wiktionary.org/wiki/capital
• OER Commons. CC BY http://www.oercommons.org/courses/15-414-financial-management-summer-2003/view
Free to share, print, make copies and changes. Get yours at www.boundless.com