Cost of Capital

This course begins with a look at the connection between the cost of capital to the firm and risk versus expected returns to investors for the different types of corporate securities. We’ll look at the trade-offs issuers are considering when assessing the relative cost of different types of capital versus risk to the firm when trying to optimize capital structure. We’ll also learn how to calculate the after-tax cost of debt capital from straight debt and convertible debt, securities based on current borrowing rates as well as calculate the cost of equity capital using both a dividend discount approach and the capital asset pricing model (CAPM). This course also looks at the potential issues regarding the cost of equity capital as computed via CAPM as it relates to values used for equity betas, market risk premium and choice of risk-free rate and explain the connection between common stock betas and company leverage, adjust beta for different degrees of leverage in capital structures and describe potential applications of adjusted betas. We’ll learn how to calculate weighted-average cost of capital (WACC) and discuss the potential impact on WACC due to changes in capital structure, dividend policy or investment policy. We’ll wrap up the course with a look at the rationale for use of WACC or the cost of equity capital in a discounted cash flow valuation, including what cash flow measure either would be appropriate for valuing. This course is part 2 of the New York Institute of Finance’s Corporate Finance & Valuation Methods Professional Certificate.