Module 3 Week 6 Lecture Notes.docx - Module 3 Week 6 Lecture 1 Cost of Capital The cost to borrow long-term funds Min acceptable return for a new asset

Module 3 Week 6 Lecture Notes.docx - Module 3 Week 6...

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Module 3: Week 6 Lecture 1: Cost of Capital The cost to borrow long-term funds Min. acceptable return for a new asset Cost of capital = required return What factors influence cost of capital? Economy Business & Finance risk Firm’s capital structure (mix of debt & equity) Four Sources of Long-Term Funds Bonds (debt) Calculate the YTM or “Cost to Maturity” K d = cost of debt K d = $interest + (Par-Net Proceeds / Years) [Par + 2(Net)] / 3 Example: Builtrite will sell 9% coupon, 25 year, $1,000 par value bonds to raise money. The bonds will sell at $20 discount & under-writing (flotation) costs will be $25. Builtrite’s tax rate is 40%. What is Builtrites’ after tax cost of debt? p

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