Essentials of Finance
Prior to beginning work on this journal,
- Read Chapter 11 in the Essentials of Finance (2nd ed.) textbook (attached)
- Review Chapter 1, Section 1.1 Valuation, with a focus on the Four Factors of Valuation in the Essentials of Finance (2nd ed.) textbook
Reflect
All financing securities have risk, and these risks are reflected in the interest rates or required rates of return that the security owners require to compensate for the risk. Debt has lower cost (lower interest rates) than equity but must be repaid. Equity securities, such as common stock, require higher rates of return (higher costs) but are long-term securities that do not have to be repaid by a specific maturity date. Companies use a combination of debt and equity securities to finance their growth opportunities. This combination of financing securities is referred to as the company’s capital structure. The combination of debt and equity securities results in a net combined cost of financing, referred to as the weighted average cost of capital. Companies seek to minimize the weighted average cost of capital while obtaining the most advantageous forms of capital to fund their business opportunities.
Write
In your journal,
- Explain the cost of debt, the cost of equity, and the weighted average cost of capital (from Chapter 11) in your own words.
- Describe an example of an individual using debt to purchase something, the cost of that debt, and how the lender considers the risk of that debt.
- Compare the cost of debt and equity in corporate finance to the financial status of an individual.
- Do individuals use debt, and if so, what is the cost?
- Do individuals have equity (or assets that are not debt) and if so, what is the cost or expected rate of return on those assets?
- Ask at least two questions about the cost of capital concepts in Chapter 11 or about any finance concepts covered in this class.
- Explain how learning finance will impact your career or personal life.
- Discuss how your perspective of finance has changed as a result of this class.
Requirements: clear
Answer preview to Essentials of Finance
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