Chapter 9 - Cost of Capital (Summary)
Principles of Managerial Finance - 14th Edition
Lawrence J. Gitman • Chad J. Zutter
This chapter is divided into two large sections and each of the sections
is broken into several subsections:
1. Understanding the concept of cost of capital:
● Overview of the cost of capital
● Basic concept
● Sources of long-term capital
2. Learning about the cost of each type of capital:
● Cost of long term debt
● Cost of preferred stock
● Cost of common stock
● Weighted average cost of capital
Here we talk briefly about what each of the subsections is all about. While reading
the summary of the subsections, we must try to explain the concepts thoroughly to
ensure that we understand them. The summarized concepts will be helpful to cover
the whole chapter quickly only if one has a good understanding of the chapter.
Subsections of Section 1:
● Overview of the cost of capital:
○ It mainly talks about the definition of the cost of capital and how it is
essential to maximize shareholder wealth.
● Basic Concept:
○ It mainly talks about the financing mix and how the cost of capital is all
about calculating the overall cost of capital rather than the cost of a
single source of capital. This idea is later introduced as the weighted
average cost of capital.
● Sources of Long-term Capital:
○ It talks about capital budgeting and how it is connected to the cost of
capital.
○ Talks about the four basic sources of long-term capital.
■ Cost of long term debt
■ Cost of preferred stock
■ Cost of common stock
Principles of Managerial Finance - 14th Edition
Lawrence J. Gitman • Chad J. Zutter
This chapter is divided into two large sections and each of the sections
is broken into several subsections:
1. Understanding the concept of cost of capital:
● Overview of the cost of capital
● Basic concept
● Sources of long-term capital
2. Learning about the cost of each type of capital:
● Cost of long term debt
● Cost of preferred stock
● Cost of common stock
● Weighted average cost of capital
Here we talk briefly about what each of the subsections is all about. While reading
the summary of the subsections, we must try to explain the concepts thoroughly to
ensure that we understand them. The summarized concepts will be helpful to cover
the whole chapter quickly only if one has a good understanding of the chapter.
Subsections of Section 1:
● Overview of the cost of capital:
○ It mainly talks about the definition of the cost of capital and how it is
essential to maximize shareholder wealth.
● Basic Concept:
○ It mainly talks about the financing mix and how the cost of capital is all
about calculating the overall cost of capital rather than the cost of a
single source of capital. This idea is later introduced as the weighted
average cost of capital.
● Sources of Long-term Capital:
○ It talks about capital budgeting and how it is connected to the cost of
capital.
○ Talks about the four basic sources of long-term capital.
■ Cost of long term debt
■ Cost of preferred stock
■ Cost of common stock
