Chapter 10

Chapter 10 - 10-1 CHAPTER 10 The Cost of Capital Sources of...

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Unformatted text preview: 10-1 CHAPTER 10 The Cost of Capital Sources of capital Component costs WACC 10-2 What sources of long-term capital do firms use? Long-Term Capital Long-Term Debt Preferred Stock Common Stock Retained Earnings New Common Stock 10-3 Calculating the weighted average cost of capital WACC = w d r d (1-T) + w p r p + w c r s The ws refer to the firms capital structure weights. The rs refer to the cost of each component. 10-4 Should our analysis focus on before-tax or after-tax capital costs? Stockholders focus on A-T CFs. Therefore, we should focus on A-T capital costs, i.e. use A-T costs of capital in WACC. Only r d needs adjustment, because interest is tax deductible. 10-5 How are the weights determined? WACC = w d r d (1-T) + w p r p + w c r s Use accounting numbers or market value (book vs. market weights)? Use actual numbers or target capital structure? 10-6 Component cost of debt WACC = w d r d (1-T) + w p r p + w c r s r d is the marginal cost of debt capital. The yield to maturity on outstanding L- T debt is often used as a measure of r d . Why tax-adjust, i.e. why r d (1-T)? 10-7 A 15-year, 12% semiannual coupon bond sells for $1,153.72. What is the cost of debt (r d )?...
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Chapter 10 - 10-1 CHAPTER 10 The Cost of Capital Sources of...

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