Fin9770BrighamCh09NA33-42.pptx - Weighted Cost of Capital •The weighted cost of capital is just the weighted average cost of all of the financing

Fin9770BrighamCh09NA33-42.pptx - Weighted Cost of Capital...

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Weighted Cost of Capital The weighted cost of capital is just the weighted average cost of all of the financing sources. After tax (for debt) After floatation costs Weights are market values Why market not book? Consider the required return for common stock ): r s = D 1 /netP 0 + g P 0 is market value not book value Using CAPM also relies on market values
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Market value Balance Sheet for Jones Co. Assets Liabilities & Net Worth Cash……… .$ 30 Bonds payable… $ 40 Accts Receiv… 20 Preferred stock... 20 Inventories…… 50 Common @par + PP&E………. 100 Retained earnings.. 140 Total ……… $ 200 Total…………. $200
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Weighted Cost of Capital for Jones Corporation Component Source Cost Weight . debt * 6% $40/$200 = 20% preferred 10 % $20/$200 = 10% common 16% $140/$200 =70% *after tax (WACC)= .20 (6%) + .10 (10%) + .70 (16%) = 13.4%
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Question for you Given the following: Net of floatation component cost Mkt Val Debt (before tax) 8% $25 Preferred 10% $15 Common 16% $60 The tax rate is 25% Compute the weighted cost of capital(WACC).
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