Opportunity cost of capital formula
[DOC File]Cost of Capital, Instructor's Manual
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The rate of return is also called: I) discount rate; II) hurdle rate; III) opportunity cost of capital A. I only B. I and II only C. I, II, and III D. None of the given ones 6. Present value of $121,000 expected to be received one year from today at an interest rate (discount rate) of 10% per year is: A. $121,000 B. $100,000 C. $110,000 D. None of the above 7. One year discount factor at a ...
[DOC File]Cost of Capital Formulas - McGraw-Hill
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Another way to think of the cost of capital is as the opportunity cost of funds, since this represents the opportunity cost for investing in assets with the same risk as the firm. When investors are shopping for places in which to invest their funds, they have an opportunity cost. The firm, given its riskiness, must strive to earn the investor’s opportunity cost. If the firm does not achieve ...
[DOC File]Chapter 3: BENEFITS AND COSTS, SUPPLY AND DEMAND
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This opportunity cost represents the market value of all the inputs used by the companies to produce the cars. The article mentions that the car companies must pay workers even if they are not working (and thus producing cars). This implies that the wages paid to these workers are sunk and are thus not part of the opportunity cost of production. On the other hand, the wages would still be ...
[DOC File]Part II: The Cost of Capital - exinfm
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9. Calculate the weighted average cost of capital (WACC) using book value and market value weightings. 10. Distinguish between average and marginal cost of capital. 1. The Cost of Capital. 1.1. Concept. of cost of capital. 1.1.1 Cost of Capital (a) The . cost of capital. is the . rate of return. that the enterprise must pay to . satisfy the ...
[DOC File]Chapter 13 The Cost of Capital
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Introduction to Risk, Return, and the Opportunity Cost of Capital. 1. return = = = .15 = 15%. dividend yield = dividend / initial price = 2/40 = .05 = 5%. capital gains yield = capital gains / initial price = 4/40 = .10 = 10% . 2. dividend yield = 2/40 = .05 = 5%. The dividend yield is unaffected; it is based on the initial price, not the final price. capital gain = $36 – $40 = ($4. capital ...
[DOC File]Chapter 02 How to Calculate Present Values
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An investment opportunity was recently appraised using each of these methods and was estimated to provide a positive NPV of $10·5 million, an IRR of 15% and a DPP of three years. Following this appraisal, it was discovered that the cost of capital of the company was lower than had been previously estimated.
[DOC File]Solutions to Chapter 9
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The opportunity cost of capital for a project reflects where the funds are used, not where the funds come from. Example: Assume that Project A will be accepted and financed with a risk-free debt issue (and B rejected). Assume that the interest rate on the risk-free debt issue is 5%. Aside. Is it reasonable to assume that ABC Inc. can issue risk-free debt to finance a risky project? What are ...
How to Calculate Opportunity Cost of Capital | Bizfluent
The WACC formula seems to say that the cost of capital decreases with leverage because of interest tax shields. That is not necessarily so. Suppose, for example, that the extra personal tax on debt interest exactly offsets the advantage of the corporate interest tax shield. In that case . WACC = (1-TC) rD D/V + rE E/V = r, and MM’s proposition II becomes rE = r + (r – rD (1-TC))D/E. Also ...
[DOC File]Chapter 9 - Capital Budgeting and Risk
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The weighted average cost of capital, WACC, is the weighted average of the after-tax component costs of capital—-debt, preferred stock, and common equity. Each weighting factor is the proportion of that type of capital in the optimal, or target, capital structure. The after-tax cost of debt, rd(1 - T), is the relevant cost to the firm of new debt financing. Since interest is deductible from ...
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