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2.9 Stud%20Week%2011%20lect%201%20Cost%20of%20Capital

2.9 Stud%20Week%2011%20lect%201%20Cost%20of%20Capital -...

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    Cost of Capital – Part 2 Week 11 Lecture 1
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    Topics Covered Weighted Average Cost of Capital (WACC) Calculating Required Rates of Return Measuring Capital Structure Weights (next time)
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    Cost of Capital - review Cost of Capital  - The return the firm’s investors  could expect to earn if they invested in assets  with comparable degrees of risk.
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    Weighted Average Cost of Capital -  review WACC = w d r d (1-T) + w p r p  + w c r s   The w’s refer to the firm’s capital structure  weights. The r’s refer to the cost of each component.
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    WACC - review Three Steps to Calculating Cost of Capital 1. Calculate the value of each security as a  proportion of the firm’s market value. 2. Determine the  ____________________  on  each security. 3. Calculate a weighted average of these required  returns.
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    Component Costs – bonds and  preferred stock Bonds Preferred Stock Price of Preferred Stock = solve for r preferred
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    Component Costs – common  equity CAPM:  DCF: Own-Bond-Yield-Plus-Risk-Premium: Three ways to determine the cost of  common equity, r s
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    Component cost of debt  WACC = w d r d (1-T)  + w p r p  + w c r s   r d  is the marginal cost of _____ capital. The _______________ on outstanding L-T  debt is often used as a measure of r d . The relevant cost of _______ is its  _________________________
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Component Cost of Debt Taxes are an important consideration in the company  cost of capital because interest payments are deducted  from income before tax is calculated.
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