8-3040 2010 COC

8-3040 2010 COC - THE COST OF CORPORATE CAPITAL There are...

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THE COST OF CORPORATE CAPITAL
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There are four sources of long-term capital: Bonds Preferred stock Weighted Average Cost of Capital Retained earnings WACC Common stock k = R f + risk premium return required business risk (investment policy) by investors financial risk (financing policy) maturity risk (yield curve) liquidity risk
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Cost of Bonds (when sold for par value) Bonds are the only tax deductible cost k d (1 - T) Assume: A 25 year bond with a 12% coupon, selling price $1,000. Tax rate 40%. k d = 12(1 - .40) = 7.2% Before tax cost
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Cost of Bonds (when not sold for par value) Assume: AVM Corp. sells a 20 year bond with a 12% coupon, for $930 net. What would be the cost to AVM of this bond. The tax rate is 40%. N 40 PMT 60 PV -930 FV 1000 CPT I/Y times 2 = 6.49 x 2 = 12.98% 12.98(.60) = 7.79%
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Cost of Preferred Stock k p = D p /P p Assume: Annual cash dividend = $2.80 per share Selling price = $40 per share k p = $2.80/$40 = 7.0%
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Cost of Retained Earnings k s = D 1 /P o + g Assume: Dividend for the past 12 months
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8-3040 2010 COC - THE COST OF CORPORATE CAPITAL There are...

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