Determining Cost of Capital: The Key to Firm Value - Softcover

Johnson, Hazel

Softcover

ISBN 10: 0273638807 ISBN 13: 9780273638803

Publisher: Financial Times Management, 1999

Synopsis

How many vital corporate decisions are based on educated guesses and corporate rules-of-thumb?  Effective executive decisions demand a more robust framework of analysis. Making the right decision about major capital investments depends in large measure on the firm's cost of capital.  An investment in property, equipment or another company is advisable if the investment will earn the cost of capital.  If the investment does not clear this hurdle rate, the value of the firm will decline.  The correct assessment of the cost of capital is one of the most critical management decisions.  Determining Cost of Capital helps managers identify each source of capital and to differentiate these sources. The books answers several critical questions:What are the factors that attract a firm's cost of capital in the case of each supplier of capital?  How does a change in the cost of capital affect the selection of capital projects?  How is risk and uncertainty incorporated into the cost of capital? Both the book and accompanying software are designed to be a ready resource to support management efforts in maximising the value of the firm.

About this title

About the Author:

Dr. Hazel J. Johnson is Distinguished University Scholar at the University of Louisville and Professor of Finance (USA). Dr. Johnson was formerly a member of the finance faculty of Georgetown University (Washington, DC, USA).

She has authored more than 20 books in the areas of international finance and financial institutions. With publications in the USA, Europe, Latin America, and Asia, Dr. Johnson's work has been translated into Japanese and Spanish.

In addition, she has developed software systems for business practitioners in the areas of bank valuation, capital budgeting, cost of capital, and mergers and acquisitions.

Dr. Johnson has acted as a consultant to more than 50 major US financial institutions and a number of state and federal agencies.

Excerpt. © Reprinted by permission. All rights reserved.:

Foreword

Making the right decision about major capital investments depends in large measure on the firm's cost of capital. An investment in property, equipment, or another company is advisable if the investment will earn the cost of capital. If the investment does not clear this hurdle rate, the value of the firm will decline. The correct assessment of the cost of capital is one of the most criti-cal management decisions.

Determining Cost of Capital: The Key to Firm Value helps managers identify each source of capital and to differentiate these sources. Capital includes bank financing in the form of lines of credit, term loans, asset-based loans, and syndicated loans. Other sources of debt capital are medium-term notes, domestic bonds, and international bonds. Firms obtain equity capital by issuing preferred and common stock. The ultimate mix of these capital components will drive the firm's cost of capital. An increasingly important aspect of raising new capital is securitization of loans and trade receivables: that is, pooling financial assets and selling claims to the pool to investors. The book describes computing the cost of capital for every mix of debt and equity and for varying risk envi-ronments.

The Cost of Capital Software Systems which accompanies the book implements the concepts. With modules for debt, preferred stock, and common stock, the Excel based system permits the evaluation of cost of capital by a publicly-traded firm and by a privately-held company. Debt information for the firm is automatically analyzed to arrive at the after-tax cost of debt on a weighted basis. Cost of preferred equity is computed on the basis of parameters of the issue. Cost of common equity for a publicly-traded company is based on the most advanced approach - market parameters, government security returns, and the relative volatility of the company stock. For a privately-held company, cost of common equity is derived from comparable industries and the firm's debt-to-equity ratio. The system computes beta the measure of risk for common stock. In every case, the weighted average cost of capital is automatically computed.

Determining Cost of Capital: The Key to Firm Value answers critical questions: What are the factors that affect a firm's cost of capital in the case of each supplier of capital? How does a change in the cost of capital affect the selection of capital projects? How is risk and uncertainty incorporated into the cost of capital?

Both the book and the software system are designed to be a ready resource to support management efforts to maximize the value of the firm.

About this edition

• Publisher: Financial Times Management
• Publication date: 1999
• ISBN 10: 0273638807
• ISBN 13: 9780273638803
• Binding: Paperback
• Number of pages: 256