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Lecture_10_student - Lecture 10: Cost of Capital: I BD...

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Lecture 10: Cost of Capital: I BD Chapter 10
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Topics Cost of Debt Cost of Preferred Stock Cost of Common Stock CAPM Approach Dividend-Yield-Plus-Growth-Rate Approach (DCF Approach) Bond-Yield-Plus-Risk-Premium Approach
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What types of long-term capital do firms use? Capital Components Long-Term Debt Preferred stock Common equity Cost of Capital: Component cost: required rate of return for capital component
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Capital Components Accounts payable, accruals, and deferred taxes are not included in the cost of capital. They are not sources of funding that come from investors We do adjust for these items when calculating the cash flows of a project, but not the cost of capital. Short-term debt is usually not included in the cost of capital Majority of short-term debts are seasonal Included for some US companies and international companies: Japanese companies
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Cost of Capital Tax effects Most firms incorporate tax effects in the cost of capital. Therefore, we focus on after-tax costs. Only cost of debt is affected. 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 marginal costs.
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National Computer Corporation (NCC) Target Capital Structure 30% debt, 10% preferred stock, and 60% as common equity Cost of Debt: Bond Yield Ask investment banker what the coupon rate would be on new debt if wants to sell bond at par.
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Lecture_10_student - Lecture 10: Cost of Capital: I BD...

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