FIN300 course notes - Cost of Capital \u00be The cost to borrow long-term funds \u00be The minimum acceptable return for a new asset cost of capital = required

FIN300 course notes - Cost of Capital u00be The cost to...

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Cost of Capital ¾ The cost to borrow long-term funds ¾ The minimum acceptable return for a new asset cost of capital = required return What factors influence the cost of capital? 1. economy 2. business & financial risk 3. a firm’s capital structure (mix of debt & equity) Four sources of long-term funds: 1. Bonds (Debt) Calculate the ‘YTM’ or “cost to maturity” K d = cost of debt $ interest + Par – current K d = ________________Years____ Par + 2 (current) 3 Ex: Builtrite will sell 9% coupon, 25 year, $1000 par value bonds to raise money. The
Bonds will sell at a $20 discount and under-writing (floatation) costs will be $25. Builtrite’s tax rate is 40%. What is Builtrites’ after tax cost of debt? 2. Preferred Stock Kp = cost of preferred stock Kp= Dividend = DNet Proceeds NBuiltrite will issue a $40 par value preferred stock with an 8% coupon. The stock is expected to sell at $38. Floatation costs will be $3.50 per share. What is Builtrite’s after after tax cost of preferred stock? p p
4. New Common Stock a firm will need to sell new common stock when it uses up its retained earnings. KNC= Dl+ Net Proceeds ‘NNC(continue example #3) Floatation costs to sell common stock will be $0.50 per share and the expected selling price of the stock is $46.75. What is the after tax cost of selling new common stock? g