chapter 10 notes

chapter 10 notes - BUS 320 Chapter 10 Notes Cost of Capital...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
BUS 320 Chapter 10 Notes
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Cost of Capital –Basic Definitions Any increase in total assets must be financed by an increase in one or more of the following capital components. Debt Preferred Stock Common Stock
Background image of page 2
Basic Definitions (Con.) Each firm has an optimal capital structure- mix of debt, preferred and common equity that causes its stock price to be maximized. Therefore a value maximizing firm will estimate its optimal capital structure and use it as a target and raise new capital in a manner designed to keep actual on target.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Weighted Cost of Capital (WACC) (% of debt) * (After-tax cost of debt) + (% of preferred stock)* (Cost of Preferred Stock) + (% of common equity)* (cost of common equity)
Background image of page 4
• Defined as r d (1-T) After-tax cost of debt is used to calculate weighted average cost of capital . Government in effect pays part of the cost of debt because interest is deductible Cost of debt is the interest rate on new debt, not that on already outstanding debt. THEREFORE MUST USE YTM NOT COUPON
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 13

chapter 10 notes - BUS 320 Chapter 10 Notes Cost of Capital...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online