5. The Cost of Capital and Valuation
Section outline
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In this module, we learn how financial leverage affect a firm's cost of capital and how we can actually capitalize firm cash flows. After we have discussed in detail the issues of financial planning and cash flow estimation in the course Financial Planning for Managers, this moduletakes the logical next step towards the estimation of firm value.
We present two conceptual approaches towards the estimation of firm value: the so-called DCF-WACC approach and the DCF-APV approach. We also learn how to estimate the WACC (Weighted Average Cost of Capital) in practice.