ch 10 combined

ch 10 combined - Chapter 10 The Cost of Capital Sources of...

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The Cost of Capital Chapter 10 § Sources of Capital  § Component Costs § WACC § Adjusting for Flotation Costs § Adjusting for Risk 110-1
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What sources of long-term  {583DFA52-1834-4AEA-98E8-3E06970CB658} Long-Term Capital {62571D1C-1C32-4B35-9E15-3F34811C6A57} Long-Term Debt ferred Stock {C54187D5-D24F-41FA-BD93-A0C7152467FF} Common Stock ined Earnings {B88852FD-F88B-488D-8FD0-5B37053D4AD8} New Common Stock 210-2
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Calculating the Weighted  WACC = wdrd(1 – T) + wprp + wcrs  § The w’s refer to the firm’s capital structure  weights. § The r’s refer to the cost of each component. 310-3
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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  A-T costs of capital in WACC.  Only rd needs  adjustment, because interest is tax  deductible. 410-4
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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). 510-5
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How are the weights  WACC =  wd rd(1 – T) +  wp rp +  wc rs  610-6 § 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 WACC = wd rd(1   T)  + wprp + wcrs  710-7 § rd is the marginal cost of debt capital. § The yield to maturity on outstanding L-T debt  is often used as a measure of rd.
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