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We discussed financial analysis (chapter 3), working capital management and the financing decision (chapter 6), and current asset management (chapter 7). This week have moved on to the Cost of Capital (chapter 11) and the Capital Budget Decision (chapter 12). As you can imagine, these topics are all related and can be seen as a progression. Respond to at least one of the questions below:

The Cost of Capital (also known as the Weighted Average Cost of Capital or WACC) is the average cost of all of the different kinds of capital that the company is using. The company could be utilizing various forms of debt, preferred stock, and/or common stock. When looking at cost of debt we measure it by the cost of raising new funds. If we were talking about bonds, we would look at the cost of issuing new bonds. If we were talking about bank loans, we would look at the cost of getting a loan at a bank. Why wouldn't we just use the cost of the current bonds or loans?

The book goes through multiple ways to ways to value of the cost of common stock. As you have seen in the book, value and putting a cost to common stock is not that clear. If a company pays a dividend it is a fairly straightforward formal, but most companies don't pay a dividend. What are the five ways to value the cost of new common stock for a company that doesn't pay a dividend? What are some of the issues or short comings of these models?

The book states that the capital budgeting decision involves the planning of expenditures for a project with a life of at least one year and usually considerably longer. Figure 12-1 provides a flow chart of the decision-making process. The book quickly goes into the importance of cash flow. I have said it before and I'll probably say it again, cash is king. Cash flow is the backbone of a company and should be the center piece to decisions. What is the difference between cash flow and accounting flow? Why is cash flow more important than reported earnings? How do we get from reported earnings to cash flow?

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