One of the reasons economists and managers want to understand a company’s economic profit is to determine the market value of a company. Understanding a company’s value is important for many reasons, one of which is to determine the company’s cost of capital. Why is determining a company’s cost of capital important? Consider this in the following discussion.
Review the opening case “Considering the Cost of Capital,” on page 312. Use the information from Chapter 19 to answer the following questions.
Please respond to all of the following prompts in the class discussion section of your online course:
1. What is the best way to measure a firm’s performance? Explain your reasoning.
2. Why do managers need to understand the difference between economic profit and accounting profit? Provide an example of economic vs. accounting profit from your own experience.