Cost of Capital – Foundational Topics

Mastering Cost of Capital: Foundational Topics for the CFA Level 1 Exam

Welcome to the fascinating world of Cost of Capital! Ready to crunch some numbers and become a cost of capital whiz? Let’s dive in!

Weighted Average Cost of Capital

Embark on a journey to the heart of the cost of capital with WACC. Uncover its key components, learn how to calculate it, and grasp its significance in a firm’s capital decisions. Understand the role of tax, how weights are assigned, and why it doubles as the marginal cost of capital. Plus, apply your newfound knowledge in a practical example with Polix Corp.

► Ready to get cracking with WACC? Try our WACC calculation challenge here.

Costs of the Different Sources of Capital

Dive deeper into the WACC calculation, understanding how to determine the cost of debt, preferred stock, and common equity for a firm. Master the yield-to-maturity and debt-rating approach for estimating the cost of debt, learn to compute the cost of preferred stock, and get familiar with the CAPM and Bond Yield Plus Risk Premium approach for estimating the cost of common equity.

► Feeling confident? Check your understanding of WACC calculation here.

Project Beta

Unravel the concept of Project Beta, a nifty tool that measures a project’s systematic risk independently of a firm’s overall risk. Discover the pure-play method for estimating a project’s beta and learn to unlever and re-lever beta based on different capital structures. Don’t forget to take note of the challenges involved in estimating beta.

► Ready for a beta battle? Check your understanding with our project beta estimation exercise here.

Flotation Costs

Take a deep dive into flotation costs, learning how they play a crucial role when a company is raising new capital. Find out why considering these costs is crucial in capital project evaluations and discover the correct way to account for these costs. Plus, you’ll learn how to estimate the cost of equity, WACC, and NPV, taking flotation costs into account.

► Want to test your understanding? Jump into our flotation costs interactive exercise here.