Part A: What is the difference between "Cost of Capital" and "Weighted Average Cost of Capital (WACC)"? Why is this difference important? Why do firms calculate WACC? Why is this number important?
Part B: Describe the following terms and their relative importance to stock issues: IPO, underwriter, spread, prospectus, underpricing.
Cost of Capital:
The opportunity cost of an investment. The rate of return that a company would earn at the same risk level as the investment that has been selected. For example, when an investor buys stock, he expects that investment to generate a return. Since the individual expects to receive more than his initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock.
Weighted Average Cost of Capital:
Every company has a capital structure - a general understanding of what percentage of debt comes from retained earnings, common stocks, preferred stocks, and bonds. By taking a weighted average, we can see how much ...