ch 10 combined

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

This preview shows pages 1–8. Sign up to view the full content.

The Cost of Capital Chapter 10 § Sources of Capital  § Component Costs § WACC § Adjusting for Flotation Costs § Adjusting for Risk 110-1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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
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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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
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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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?
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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern