Chapter 10-= ’ rd interest rate on firm s new debt-( - )=- rd 1 T A T component cost of debt-= rp component cost of preferred stock-= rs component cost of equity-= re component cost of external equity-, , , = wd wp ws we target weights of , , debt preferred stock retained , earnings and external equity = ( - )+ + WACC wdrd 1 T wprp wcrs = / > rp Dp Pp / Dividend Current Price = + = / + = rs rRF RP D1 Po g r^s = . - -after tax cost of debt int rate B T ( - ) rd 1 T- , if stock market is in equilibrium = ; = rs r^s required rate expected rate CAPM : = +(-) rs rRF rm rRF b : DCF = / + rs D1 Po g : + /-Constant rate Po D1 rs g : =( /( + ) )+ Grow indefinitely Po D1 1 rs ^1 ( /( + ) )… D2 1 rs ^2 Own bond yield plus risk : premium = + rs rd RP = + rs bond yield risk premium-, = / on calc rd I yr for the solver function-yield on preferred stock is lower than on debt-Estimating growth : rates = g ROExretention =( / ) ( -/ ) ratio NI equity x 1 dividend EPS-: Cost of equity from new stock
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This note was uploaded on 12/01/2010 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.