CFFM6_ch 10_slides - Chapter 10 The Cost of Capital Sources...

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The Cost of Capital Chapter 10 Sources of Capital  Component Costs WACC Adjusting for Flotation Costs Adjusting for Risk 10-1
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What sources of long-term capital do  firms use? 10-2
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Calculating the Weighted Average Cost  of Capital 10-3
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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  10-4
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Should our analysis focus on historical  (embedded) costs or new (marginal) costs? The cost of capital is used primarily to make  decisions that involve raising new capital.  So,  focus on today’s marginal costs (for WACC). 10-5
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How are the weights determined? 10-6 Use accounting numbers or market value  (book vs. market weights)? Use actual numbers or target capital  structure?
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Component Cost of Debt 10-7
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A 15-year, 12% semiannual coupon bond sells  for $1,153.72.  What is the cost of debt (r d )? Remember, the bond pays a semiannual  INPUTS OUTPUT N I/YR PMT PV FV 30 5 60 1000 -1153.72 10-8
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Component Cost of Debt Interest is tax deductible, so  10-9
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Component Cost of Preferred Stock 10-10
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What is the cost of preferred stock?
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