ch 10 combined

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

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Unformatted text preview: The Cost of Capital Chapter 10 § Sources of Capital § Component Costs § WACC § Adjusting for Flotation Costs § Adjusting for Risk 110-1 What sources of long-term { 5 8 3 D F A 5 2 -1 8 3 4 -4 A E A -9 8 E 8 -3 E 0 6 9 7 0 C B 6 5 8 } Long-Term Capital { 6 2 5 7 1 D 1 C -1 C 3 2 -4 B 3 5 -9 E 1 5 -3 F 3 4 8 1 C 6 A 5 7 } Long-Term Debt ferred Stock { C 5 4 1 8 7 D 5 -D 2 4 F -4 1 F A -B D 9 3 -A 0 C 7 1 5 2 4 6 7 F } Common Stock ined Earnings { B 8 8 5 2 F D -F 8 B -4 8 D -8 F D 0 -5 B 3 7 0 5 3 D 4 A D 8 } 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 Should our analysis focus on before- § 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 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....
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This note was uploaded on 02/09/2010 for the course BUS 101 taught by Professor Noname during the Spring '10 term at KCTCS.

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

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