vv-15 - Ch 9 Cost of capital Why is cost of capital...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Ch 9 Cost of capital Why is cost of capital important. Discount rate for TVM and DCF Cost of debt Think of this as the borrowing rate Have to control for flotation costs Has to be after tax Cost of equity Preferred Have to control for flotation costs Perpetuity equation kps = D/NPps Common 2 ways to do common For retained earnings (internal equity), NO flotation costs 1. CAPM -> kcs = Rrf + beta(Rm-Rf) 2. Gordon model Kcs = D1/P0 + g For external equity -> must use flotation costs 1. CAPMexternal = CAPMinternal *(1+flotation costs %) 2. Gordon Model -> Kcs = D1/NP0 + g WACC WACC = C P D kcs + kps + kd (1 − t ) V V V Can expand to internal and external equity: WACC = C P D Ci kics + o kocs + kps + kd (1 − t ) V V V V and multiple types of debt: WACC = B Ci C P N kics + o kocs + kps + kn (1 − t ) + kb (1 − t ) V V V V V When discounting, have to use the right cost of capital. ...
View Full Document

This note was uploaded on 04/07/2011 for the course BUS M 301 taught by Professor Jimbrau during the Winter '11 term at BYU.

Ask a homework question - tutors are online