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1、19878_10_c10_p317-354.qxd2/22/0610:29AMPage317CHAPTER10DeterminingtheCostofCapitalMostimportantbusinessdecisionsrequirecapital.Forexample,whenDaimler-BenzdecidedtodeveloptheMercedesML320sportutilityvehicleandtobuildaplantinAlabamatoproduceit,Daimlerhadtoestima
2、tethetotalinvestmentthatwouldberequiredandthecostoftherequiredcapital.TheexpectedrateTheThomsonNOWWebsitecontainsanofreturnexceededthecostofthecapital,soDaimlerwentExcelfilethatwillguideyouthroughtheaheadwiththeproject.Microsofthadtomakeasimilardecisionchapter
3、’scalculations.ThefileforthiswithWindowsXP,PfizerwithViagra,andSouth-WesternwhenchapterisIFM9Ch10ToolKit.xls,andweitdecidedtopublishthistextbook.encourageyoutoopenthefileandfol-Mergersandacquisitionsoftenrequireenormousamountslowalongasyoureadthechapter.ofcapi
4、tal.Forexample,VodafoneGroup,alargetelecommuni-cationscompanyintheUnitedKingdom,spent$60billiontoacquireAirTouchCommunications,aU.S.telecommunicationscompany,in1999.Theresultingcompany,VodafoneAirTouch,latermadea$124billionofferforMannesmann,aGermancom-pany.In
5、bothcases,Vodafoneestimatedtheincrementalcashflowsthatwouldresultfromtheacquisition,andthendis-countedthosecashflowsattheestimatedcostofcapital.Theresultingvaluesweregreaterthanthetargets’marketprices,soVodafonemadetheoffers.Recentsurveyevidenceindicatesthatal
6、mosthalfofalllargeTODISCCOLLECTIONcompanieshaveelementsintheircompensationplansthatusetheconceptofeconomicvalueadded(EVA).AsdescribedinChapter7,EVAisthedifferencebetweennetoperatingprofitaftertaxesandachargeforcapital,wherethecapitalchargeiscalculatedbymultipl
7、yingtheamountofcapitalbythecostofcapital.Thus,thecostofcapitalisanincreasinglyimportantcomponentofcompensationplans.IMAGE:?GETTYIMAGES,INC.,PHO31719878_10_c10_p317-354.qxd2/22/0610:29AMPage318BEGINNING-OF-CHAPTERQUESTIONSAsyoureadthechapter,considerhowyoubookv
8、alueandmarketvalueweights,andwouldanswerthefollowingquestions.Youtheroleofthe“target”capitalstructureforshouldnotnecessarilybeabletoanswertheafirmwhoseactualcapitalstructureisfarqu
