Chapter 10 Part 1 notes

Chapter 10 Part 1 notes - CHAPTER10...

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1 CHAPTER 10 Determining the Cost of Capital
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2 What types of long-term  capital do firms use? Long-term debt Preferred stock Common equity
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3 Capital Components Capital components are sources of funding  that come from ________. Accounts payable, accruals, and deferred  taxes are not sources of funding that come  from investors So they are _____________ in the calculation of  the cost of capital.
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4 Before-tax vs. After-tax  Capital Costs ___________ associated with financing  can be incorporated either in capital  budgeting cash flows or in cost of  capital. Most firms incorporate tax effects in the  cost of capital.  Therefore, focus on  _________costs. Only cost of _____ is affected.
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5 Historical (Embedded) Costs  vs. New (Marginal) Costs The cost of capital is used primarily to  make decisions which involve raising  and investing new capital.   So, we should focus on ________  costs.
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6 Cost of Debt Method 1: Ask an investment banker  what the coupon rate would be on new  debt. Method 2: Find the bond rating for the  company and use the yield on other  bonds with a similar rating. Method 3: Find the yield on the  company’s debt, if it has any.
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A 15-year, 12% semiannual bond  sells for $1,153.72.  What’s r d ?    60 60 + 1,000 60 0 1 2 30 I = ? -1,153.72
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This note was uploaded on 10/12/2010 for the course FINC 3630 taught by Professor Jensen,m during the Spring '08 term at Auburn University.

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Chapter 10 Part 1 notes - CHAPTER10...

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