Lecture%208_Student_6slides

# Lecture%208_Student_6slides - Wiley-Plus FIN 221 Lecture 8...

This preview shows pages 1–3. Sign up to view the full content.

1 FIN 221 Lecture 8 CH 13 : Cost of Capital 1 Wiley-Plus • 1 additional assignment has been created in Wiley- plus website. – Lecture 5-6 Error in dividend policy lecture 2 • The next slide is a corrected version. slide 11 Corporate level Net Income Corporate Tax (30%) Cash dividends Shareholder level Cash dividends Impact of Imputation on Dividends \$1.00 0.30 0.70 070 Marginal tax rate 47% high income 17% low income \$1.00 0.30 0.70 15% Superannuation fund \$1.00 0.30 0.70 Gross-up adjustment Assessable Income Personal tax Franking credit Tax Paid Dividends after taxes 0.70 0.30 1.00 0.47 0.30 0.17 0.53 0.70 0.30 1.00 0.17 0.30 0.13 0.83 (cash refund ) 0.70 0.30 1.00 0.15 0.30 0.15 0.85 Relevant Reading Chapters • 13.1 • 13.2 • 13.3 Common stock Method 1 4 Method 2 Preferred stock • 13.4 Calculating WACC Limitation of WACC as a Discount rate CFs Available for Shareholders CFs Available for Debtholders 1 () = + n FV PV i CFs Available for both Debtholders & Shareholders Interests & Dividend 5 Principal Dividends Free Cash Flows (1+ i) n R PV= (1 +WACC) n •Cost of debt •Required rate of return for debtholders •Cost of equity •Required rate of return for shareholders •Cost of capital •Weighted average cost of capital Cost of Capital • Used to discount free cash flows • Required rate of return demanded by both debtholders and shareholders • Minimum rate of return a project should be able to produce to compensate ALL investors for bearing 6 produce to compensate ALL investors for bearing systematic risk associated with the free cash flows •An Opportunity cost – Rate of return that could be earned on another investment of similar risk

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

View Full Document
2 Cost of Capital for a project • Is that possible to estimate the discount rate that reflects the systematic risk of the incremental cash flows from a particular project? E(R i )=R rf i [E(R m )-R rf ] •W h y ? NO 7 • Firms do not issue publicly traded shares for individual projects • Meaning NO stock returns relevant to a particular project can be available Æ No beta for a particular project can be directly estimated. • Then Solution? – Estimate the cost of capital for the firm as a whole Company’s Cost of Capital • Reflects the risk of company’s existing assets • Can it be used as any new project’s cost of capital?
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 06/16/2010 for the course COMMERCE f221 taught by Professor Ala during the Spring '10 term at Uni. West.

### Page1 / 5

Lecture%208_Student_6slides - Wiley-Plus FIN 221 Lecture 8...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online