Business Finance Ch. 11

Business Finance Ch. 11 - I Solve for bond values on exam...

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March 17, 2008 Solve for bond values - on exam Assets = liabilities + owner equity Long term liabilities & common stock + retained earnings have a common cost associated with them. Chapter 11 – Cost of Capital I. Overall concept A. A firm must strive to earn at least as much as the cost of funds that it uses. B. The overall cost of funds is a proportionate average of the various sources. Equity $50 m 50% x 16% = 8% Preferred Stock $25 m 25% x 8% = 2% Bonds $25 m 25% x 4 % = 1% 100% 11% <<<WACC C. The firms required rate of return is called its cost of capital. II. Cost of Debt On exam pg. 328: 1 sentence last paragraph. The cost of debt is measured by the interest rate or yield paid to debt holders. A. The basic cost of debt to the firm in the effective yield to maturity. KD = Y x (1-tax rate) Interest is tax deductable III. Preferred Stock Kp = D/P-F << cost of new income
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p. 331 We need to make one slight alteration to the process of dividing . . the proceeds are equal to the selling price minus floatation costs. IV. Equity A. Internal financing Ke = D1/Po + g B. New Financing Ke = D1/(Po – F) + g C. Capital Asset Pricing Model (CAPM) Kj = Rf + Beta (Rm – Rf)< market risk premium
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Business Finance Ch. 11 - I Solve for bond values on exam...

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