Chapter 10 Formulas

# Chapter 10 Formulas - Interest Rate on New Debt Tax Savings...

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Chapter 10 Formulas: I. What Each Letter Stands for: r d = interest rate on the firm’s new debt = before-tax component cost of debt r d (1-T) = after-tax component of debt T = marginal tax rate r p = component cost of preferred stock r S = component cost of common equity raised by retained earnings or internal equity; required rate of return r e = component cost of external equity, or common equity raised by issuing new stock D p = preferred dividend P p = current price of preferred stock S = expected rate of return g = growth rate F = flotation cost RP = risk premium (D 1 )/(P 0 ) = dividend yield

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P 0 = current stock price D t = dividend to be paid at the end of year t
II. Formulas: WACC = (percentage of debt)(after-tax cost of debt) + (percentage of preferred stock)(cost of preferred stock) + (percentage of common equity)(cost of common equity) After-Tax Cost of Debt =

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Unformatted text preview: Interest Rate on New Debt Tax Savings = R d (1-T) Component Cost of Preferred Stock = r p = (D p )/(P p ) Required Rate of Return = Expected Rate of Return r S = r RF + RP = (D 1 )/(P ) + g = S The CAPM Approach = Step 1: Estimate the risk-free rate, r RF Step 2: Estimate the stocks beta coefficient, b i Step 3: Estimate the expected market risk premium Step 4: Substitute the preceding values in the CAPM equation to estimate the required rate of return on the stock in question: r S = r RF + b i (r M r RF ) Bond-Yield-plus-Risk-Premium Approach = r S = bond yield + risk premium Dividend-Yield-plus-Growth-Rate OR Discounted Cash Flow (DCF) Approach = P = (D 1 ) / (r S g) Cost of Equity from New Stock = r e = [(D 1 )/(P (1-F)] + g EPS 1 = EPS (1+g)...
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## This note was uploaded on 06/12/2011 for the course FINC 302 taught by Professor Lawrence during the Spring '11 term at Nicholls State.

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Chapter 10 Formulas - Interest Rate on New Debt Tax Savings...

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