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BENEFITS OF DOCUMENT
DOCUMENT DESCRIPTION
The Cost of Capital (Finance Management)
Lecture Outline
1. What types of long-term capital do firms use?
2. Should we focus on before-tax or after-tax capital costs?
3. Should we focus on historical (embedded) costs or new (marginal) costs?
4. Component Cost of Debt
5. Is preferred stock more or less risky to investors than debt?
6. What are the two ways that companies can raise common equity?
7. Why is there a cost for reinvested earnings?
8. Three ways to determine the cost of equity
9. What's the cost of equity based on the CAPM?
10. Estimating the Growth Rate
11. What factors influence a company's WACC?
12. A Project-Specific, Risk-Adjusted Cost of Capital
The concept of the cost of capital is key information used to determine a project's hurdle rate. A company embarking on a major project must know how much money the project will have to generate in order to offset the cost of undertaking it and then continue to generate profits for the company.
Cost of capital, from the perspective of an investor, is an assessment of the return that can be expected from the acquisition of stock shares or any other investment. This is an estimate and might include best- and worst-case scenarios. An investor might look at the volatility (beta) of a company's financial results to determine whether a stock's cost is justified by its potential return.
Cost of capital represents the return a company needs to achieve in order to justify the cost of a capital project, such as purchasing new equipment or constructing a new building.
Cost of capital encompasses the cost of both equity and debt, weighted according to the company's preferred or existing capital structure. This is known as the weighted average cost of capital (WACC).
A company's investment decisions for new projects should always generate a return that exceeds the firm's cost of the capital used to finance the project. Otherwise, the project will not generate a return for investors.
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Source: Best Practices in Business Case Development PowerPoint Slides: The Cost of Capital (Finance Management) PowerPoint (PPT) Presentation, UJ Consulting
ABOUT THE AUTHOR: UJ CONSULTING
UJ Consulting
Untung Juanto ST., MM. Founder of UJ Consulting. He is professionally experienced business and management consultant in several local and multinational companies.
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He has an experience in managing an effective and efficient company with various approach methods adapted to different industries because He had a career from the lower management level as Supervisor before finally being at the top management level. His Top Management experience started from the position of General Manager, VP Operation, HR Director and Business Development Director
He completed his undergraduate education majoring in Architecture at Diponegoro University, Semarang, Central Java, Indonesia. After that, He continued to Master of Management level majoring in Human Resource Management with cum laude predicate with a GPA of 3.94 at Mercubuana University, Jakarta, Indonesia.
His last work experience as Deputy President Director at Hutahaean Group in charge of 14 business units engaged in various industries including CPO Production, Oil Palm Plantation, Cassava Plantation, Tapioca flour production, 4 and 5 star hotels, waterparks, golf courses and housing with a total of employees more than 3,000 employees.
His biggest achievement was in 2021 when He served as Deputy President Director at Hutahaean Group Indonesia by increasing the company's revenue from IDR 700 billion to IDR 1.1 trillion (y/y) and increasing the profit margin by more than 20%. Doing a turn around on business units that have lost in the last 5 years become profits. In addition, He have also succeeded in creating an efficient and effective management system by redesigning the Business Process Management (BPM), reviewing Standard Operating Procedures (SOP) and Work Instructions and compiling the appropriate Key Performance Indicator Management (KPIM) to increase employee productivity.
He is currently active as a part-time business and management consultant (online) at Enquire Corp. and Flevy Corp. In addition, He also teach part-time at several universities for courses in strategic management, human resource management, project management, entrepreneurship and business.
UJ Consulting has published 171 additional documents on Flevy.
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