Module 7: Background Transcripts We have reflected on a firm’s use of financial

Published by

Feb 26, 2023


Struggling with a similar assignment? Don’t know where to start? Don’t have time to work on this? Get a high-quality paper written for you from scratch – PLAGIARISM FREE, guaranteed to get you a good grade. To get started, please click on the Submit Your Instructions at the bottom of the page.

Module 7: Background Transcripts
We have reflected on a firm’s use of financial resources and its cost of capital using comparisons to an activity that is likely to be more familiar than a firm’s capital budgeting decision process is to most individuals. Firms incur interest and other capital costs to receive project returns. A family or individual may similarly invest in education hoping to obtain a “pay off” or “earnings premium” exceeding the cost of invested funds.  By looking at an individual or family’s decision to invest in education and a firm’s decision to invest in projects generally, using debt and perhaps also savings or equity, we expect you will gain a better understanding of both decisions.
A firm’s cost of capital is called its “weighted average cost of capital” (WACC) because it is made up of the costs of all previous project financing in the proportions or “weights” of each type of financing vehicle (debt or equity) used, multiplied by the vehicle’s cost. A firm’s WACC depends on the riskiness of projects the firm has undertaken in the past and economic factors. A firm’s WACC also depends on the mix of debt and equity chosen, because these “instruments” carry different costs. A firm is willing to undertake required capital costs, including interest on debt, because it expects project returns to exceed the cost of invested capital. A project’s gain will exceed its cost. The same is true of a family or individual investing in education.
When investing in education, individuals and families may use debt to cover a portion of a training or degree program. Like a firm, a family uses debt, even though it is associated with a visible cost. Statistics in a later part of this section indicate that an individual or family’s willingness to undertake costs of educational debt increases as payoffs or earnings premiums rise, if we assume that more advanced degrees or programs result in higher earnings on average. Most programs yielding high earnings “premiums” over no education are lengthy or expensive.
Traditionally, education has been one of the most significant drivers of individual earnings. Education is associated with earnings growth over a person’s lifetime, as well as the rate of pay in one’s first professional position. Families and individuals will weigh educational expenses against an increase in income associated with a training or educational program. On average, the cost of a college education has risen roughly eight times as fast as wages have grown, since approximately 1990 (Maldonado, 2018). Thus, while an earnings premium is expected, it is risky. A family or individual’s investment in education faces risk, just as a firm faces risk associated with its investments. A family or individual investing in education weighs a risky return against cost, just as a firm weighs a risky return against cost when it invests in a new project, in other words.
Firms and individuals or families choose a mix of financing vehicles (savings, debt, or a combination of both) to accomplish an objective. For a family or individual, an alternative to spending cash on a training or educational program might be depositing funds in a savings account, investment in a home, or paying down high-interest credit accounts. Families and individuals consider these “opportunity costs” (the next best alternative) as they calculate the returns to education. An individual might be able to invest in a savings account with a 1.5% return, for instance. This 1.5% return is an opportunity cost of using savings to pay for education. On the other hand, savings can be paid to a mortgage-holder to reduce mortgage loan principle, decreasing interest costs in the longer term.  If mortgage interest is 4%, a reduction in interest paid on existing principle can be thought of as the opportunity cost of using savings to pay educational expenses. So, while debt is costly, use of savings can also be thought of as costly. Firms similarly face opportunity costs given that funds might be invested in multiple alternative projects.
Approaching the decision to attend college, approximately 43% of all higher education attendees, including those who attend a technical college or do not complete a bachelor’s degree, choose to accept student loans in order to finance their education. 60% who obtain a bachelor’s degree and 73% who obtain a graduate degree take on student loans (Federal Reserve Board of Governors, 2020). In part, this is determined by the rate of return or “earnings premium” associated with each type of education. Individuals with professional degrees (medical doctors, dentists, or attorneys, for instance) earn more than individuals completing a certificate or bachelor’s degree program.  This earnings premium is evidently expected to more than cover associated costs.
Assume education is financed with a mix of debt (loans) and savings, and the yearly cost of interest on a student’s loans does not exceed deductible amounts. All interest paid will be tax-deductible. The payer is assumed to have a tax liability, and a family’s or individual’s credit has no influence on loan rates or availability.
In this discussion, we compare individuals’ and families’ willingness to undertake debt versus relying on equity (savings) in financing investment in an educational training or degree program to a firm’s decision to mix financing vehicles as it determines how to approach an upcoming project. We assume, for the purposes of this discussion, that a new tax policy will soon be passed that lowers the limit on deductibility of interest expense on student loans, increasing their effective cost to the borrower. Consider how this will influence educational decisions.
Initial Post
Review the introduction of Chapter 11, section 11.1, and p. 397 of Chapter 12 of our required text before you start. 
Section 1: Comparing Personal and Corporate Finance
While comparing an individual or family investing in education to a firm investing in a project of any type, discuss what cost of capital means by comparing personal cost of capital with corporate cost of capital.
[Hint: See p. 367-367, 377, and 379-381 of our required textbook.] 
Section 2: Choice of Financing Tools
Focusing on both tax issues and income issues, discuss how these factors influence whether debt or savings (equity) is a more viable option for the family and the firm.
[Hint: Consider deductibility in relation to cost of capital and required reading covering after-tax cost of debt. See p. 372 of required readings. With respect to income issues, recall that the risk premium required by investors is the reward an investor requires for taking on risk. See p. 339 of our required textbook. Also see p. 399 of your required text for information on Opportunity Costs.]


Need Writing Help? Our writing specialists are here 24/7, every day of the year, ready to support you! Instantly chat with an online tutor below or click here to submit your paper instructions to the writing team.

More than just an assignment.

Explore Now →

Who is this homework service for?

* If you are having a really hard class and want to get through it, then this is for you.

* If you have a medical emergency or someone close to you has a medical emergency and you don’t think you’ll be able to turn your assignment on time, this is definitely a service you could use.

* You can use us if you are having a tough Professor who won’t give you the grades you deserve.

* If you have a tight work schedule and you are getting points deducted for not submitting assignments on time.

* English might not be your first language and you feel like you are being left behind in class because of it.

* If you have a large project coming up and don’t think you have enough time to get it done well, definitely reach out to us.


Super stoked you are checking us out! We would like to help you with your assignment. We just need a few things from you:

* The full assignment instructions as they appear on your school account.

* If a Rubric is present, make sure to attach it.

* Any relevant weekly readings or learning resources.

* Include any special announcements or emails you might have gotten from your Professor regarding your assignment.

* Any templates or additional files required to complete the assignment.

If your assignment is somewhat complex and you need to explain it, please don’t hesitate to reach out to me via live chat. 



Frequently asked questions

How soon can I get my paper done?

It depends with your deadline. If you need your paper completed in 3 hours, we will deliver it in that time. All you need to do is indicate your deadline in our custom order page here. Alternatively, if you are sending us your instructions via email, please be sure to indicate your deadline.

Will it be completely original? I don't want to be caught in a case of Academic Integrity Violation.

We are as paranoid as you are. Maybe even more! And we understand that the greatest sin you can commit in your academic journey is plagiarizing your academic work. To that end, we have made sure that we check and double-check our papers using high quality plagiarism detection tools such as SafeAssign and Turnitin before submitting the paper to you.

Who is my writer? Is he/she a native English Speaker?

All our writers are native English Speakers. That is not to say that ESL writers are not good, we just prefer hiring native writers because we want the very best people working on your paper. This might mean paying a little bit more for your paper as opposed to when you pay a foreign company whose writers are non-native English Speakers.

What if I need revisions? Will your charge additional for this?

Of course not! If you do happen to require a revision on your paper, our team will handle it for you free of charge. Matter of fact, we won’t rest till you are happy with your paper. So, ask for as many revisions as you need, it’s completely FREE!

Will you give me my money back if I don't like my paper?

We have very few instances where we delivered a paper that a client didn’t fall in love with. But if it so happens that you don’t like your paper for any reason whatsoever, we’ll refund your money back no questions asked.

I have more assignments after this, can you help me with those too?

Of course! And what’s even better is that we can reserve a writer permanently to work on your entire class. This comes in handy for projects which build up on each other and where you need just one writer, one writing style.

I got my order information wrong, can I change that?

Yes you can. Just reach out to our support team via email ( or live chat here and they’ll help you change the instructions.

Can I place an order via email instead of going through the order page?

Yes you can. Email Anna at, she’s in charge of our sales team. Alternatively, you can talk to our Live Chat team here and request to speak to Anna.

Trusted by Thousands of Students

Delivering quality assignments since 2007

%d bloggers like this: