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Class 12 - Cost of debt o Yield to maturity when...

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Ch. 14: Cost of Capital Gives us the discount rate WACC: o Firms raise capital w/ combinations of debt, equity, and hybrid securities o Riskiness of return affects WACC: Required rate of return on securities will be higher if firm is riskier Risk influences how a firm chooses to finance (proportion of debt and equity) WACC used to value firm: o Required rates should reflect current market rates o WACC assumed to remain the same over the future Determine firm’s capital structure weights: o Debt: Short term and long term Exclude A/P and accrued expenses o Preferred stock vs. common stock
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Unformatted text preview: Cost of debt: o Yield to maturity when calculating value of bonds o Hard to find individual bond prices: Estimate yields on portfolios of debt w/ similar credit ratings • Cost of preferred stock: o Simple formula • Cost of common equity: o Either Dividend Discount Model or CAPM o DDM: Present value of a growing perpetuity formula Assume a constant growth rate, g Difficult to assume future dividends o CAPM: More common method Same formula from Ch. 8 • Flotation cost adjusted initial outlay: o Financing needed/ (1 – flotation cost %)...
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