Hello All! I am a brand new forum member - although I’ve been reading for a bit. I am a June 2008, level 1 candidate. And I have a question: In reading 44, there’s a tidbit that the cashflow analysis for an invest/do not invest decision should exclude the financing costs. That makes sense to me - assuming the Required Cost of Return already includes the cost of financing. Is the above understanding correct? IE is it true that given an identical investment and an otherwise identical firm, the Required Rate of Return used for the NPV calculation would vary based on whether: A: the firm has the cash on hand or B: needs to borrow them? If the above is correct, is it fair to say that, more or less, the Req. Rate of return would be the opportunity cost in case A (eg the rate at which the firm can lend the $ to a bank instead of investing in the project) while in case B, the rate would be the rate at which it needs to borrow the funds? Thanks!
Pardon, the “Required Cost of Return” in the second paragraph should of course read “Required RATE of Return” - I am on the Cost of Capital reading now so I can see why that word popped out.
your answer lies in the reading you are studying now (Cost of Capital). The required rate of return is the WACC -weighted avg cost of capital which includes an after tax debt component if there is any debt financing. otherwise it is just plain cost of retained earnings.
Thank you very much