Chapter_10 - 10-1 Click to edit Master subtitle style 10-1...

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Unformatted text preview: 10-1 Click to edit Master subtitle style 10-1 CHAPTER 10 The Cost of Capital n Sources of capital n Component costs n WACC Cost of Debt, Preferred Stock, and Equity n Adjusting for flotation costs n Adjusting for risk 10-2 What sources of long-term capital do firms use? 10-3 Calculating the weighted average cost of capital WACC = wdrd(1-T) + wprp + wcrs n w = the firm’s capital structure weights. n r = the cost of each component. 10-4 Should our analysis focus on historical (embedded) costs or new (marginal) costs? n Cost of capital n Used to make decisions that involve raising new capital n Focus on today’s marginal costs (for WACC). n Not historical costs n What is the cost today not the cost 10-5 Click to edit Master subtitle style 10-5 Cost of Debt 10-6 Component cost of debt WACC = wd rd(1-T) + wprp + wcrs n rd = marginal cost of debt capital. n YTM L-T debt n YTC L-T debt n Why tax-adjust, i.e. why rd(1-T)? 10-7 A 15-year, 6% annual coupon bond with par of $1,000 – sells for $695.76....
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This note was uploaded on 04/19/2011 for the course BUSFIN 1030 taught by Professor Zutter during the Summer '08 term at Pittsburgh.

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Chapter_10 - 10-1 Click to edit Master subtitle style 10-1...

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