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Lecture No61-1

# Lecture No61-1 - CostofCapital Lecture No 61 Chapter 15...

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Cost of Capital Lecture No. 61 Chapter 15 Contemporary Engineering Economics Copyright © 2006

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Cost of Capital ( k ) Cost of Equity Cost of Debt Cost of Capital
Cost of Equity ( i e ) Cost of Retained Earnings ( k r ) Cost of issuing New Common Stock( k e ) Cost of Preferred Stock ( k p ) Cost of equity : weighted average of k r k e , and k p Cost of Retianed Earnings Cost of Issuing New Stock Cost of Issuing Preferred Stock

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i c c k c c k c c k e r e r c e e p e p = + + ( / ) ( / ) ( / ) Where C r = amount of equity financed from retained earnings , C c = amount of equity financed from issuing new stock , C p = amount of equity financed from issuing preferred stock, and C e = C r + C c + C p Method 1: Calculating the Cost of Equity  based on Financing Sources
Calculating the Cost of Equity Issuing New Common Stock k D P f g e c = - + 1 0 1 ( ) Cost of Preferred Stock k D P f p c = - * *( ) 1 Cost of Equity i c c k c c k c c k e r e r c e e p e p = + + ( / ) ( / ) ( / ) k D P g r = + 1 0 Cost of Retained Earnings Where c r = amount of equity financed from retained earnings , c c = amount of equity financed from issuing new stock , c p = amount of equity financed from issuing preferred stock , and c e = c r + c c + c p

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Example 15.4 Determining the Cost of  Equity – Alpha Corporation Source Amount Fraction of Total Equity Retained earnings \$1 million 0.167 New common stock 4 million 0.666 Preferred stock 1 million 0.167
Cost of retained earnings : With D 1 = \$5, g = 8%, and P 0 = \$40 Cost of new common stock : With D 1 = \$5, g = 8%, and f c = 12.4% Cost of preferred stock : With D *= \$9, P *= 8%, and f c = 0.06 k r = + = 5 40 0 08

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Lecture No61-1 - CostofCapital Lecture No 61 Chapter 15...

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