Cost of Capital – Finance

Part 1

Primary Task Response: Your first task is to post your own Key Assignment Outline to the discussion area so that other students are able to review your plan.  The purpose of this assignment is to help improve the quality of the Key Assignment Draft that you will complete next week.

Part 2

Primary Task Response: Within the Discussion Board area, write 400–600 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas.

In this Phase, you will be learning about the concept of the cost of capital, how it is calculated, and why it is essential to be used properly. This concept, along with the time value of money concept, will be employed in addressing the Phase 5 tasks and is related to the tasks that you completed in Phase 1 and 3.

Identify and recommend at least 1 credible Web site that discusses the process of calculating the cost of capital and it components, and address at least 3 of the following topics:

  • What is the cost of capital, and what role does it play in long-term investment decisions?
  • What are the 3 basic components of the formula, and how is each estimated?
  • Why is the after-tax cost of debt used, and how does this adjustment affect the overall cost of capital?
  • Which component is generally the most expensive, and why?
  • How is the cost of capital calculated, and how are the weights of each component determined?
  • Why is the cost of retained earnings less costly than issuing new equity?
  • What is the difference between the weighted average cost of capital (WACC) and the weighted marginal cost of capital (WMCC), and when should the WMCC be used?

Be sure to document your posts with in-text citations, credible sources, and properly listed minimum of 3 references.

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