Measures of Profitability
Several important decision criteria are used to evaluate capital investments. The two most comprehensive and well-understood measures of whether or not a project is profitable are the net present value (NPV) and internal rate of return (IRR). Other measures include…
NPV Profile
Computing the NPV and IRR of a project to determine which project(s) among many others to undertake is not always as easy and straightforward as it seems. The IRR and NPV can, in fact, produce different ranking outcomes whenever mutually…
Weighted Average Cost of Capital (WACC)
The concept of cost of capital informs the investment decisions that the management of a company makes. Similarly, it is useful in the valuation of a company by investors and analysts. A company that invests in a project which produces…
How Taxes Affect the Cost of Capital
[vsw id=”I_SgGrDv1YM” source=”youtube” width=”611″ height=”344″ autoplay=”no”] Taxes can have a significant impact on the weighted average cost of capital (WACC) of a company. However, taxes affect the cost of capital from different sources of capital in different ways. The Effect…
Target Capital Structure and WACC
The target capital structure of a company refers to the capital which the company is striving to obtain. In other words, target capital structure describes the mix of debt, preferred stock and common equity which is expected to optimize the…
Optimal Capital Budget
Marginal cost of capital (MCC) plays a very important role in capital budget decision-making. When used in conjunction with the investment opportunity schedule, an optimal capital budget may be determined. Optimal Investment Decision The MCC of a company tends…
The Marginal Cost of Capital
The cost of capital should ideally reflect the riskiness of the future cash flows of a project. For an average-risk project, the opportunity cost of capital is the same as the weighted average cost of capital (WACC) of the company….
Cost of Debt Capital
The cost of debt is the cost of financing a debt whenever a company incurs a debt by either issuing a bond or taking a bank loan. Two methods for estimating the before-tax cost of debt are the yield-to-maturity approach…
Noncallable, Nonconvertible Preferred Stock
A preferred stock that does not give its holder the right to convert their preferred shares into a fixed number of common shares, usually after a predetermined date, is called a nonconvertible preferred stock. A noncallable, nonconvertible preferred stock is…
Cost of Equity Capital
A company can increase its common equity either by reinvesting its earnings or issuing new stock. The cost of equity will, therefore, be the rate of return that is required by its shareholders. Three methods are used to estimate…
