AnhNguyenFI515Week5Lab - Copy - AnhNguyenFI515Week5Lab 10-1...

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

View Full Document Right Arrow Icon
AnhNguyenFI515Week5Lab 10-1 a. The weighted average cost of capital WACC is the weighted average of the after-tax component costs of capital—-debt, preferred stock, and common equity. Each weighting factor is the proportion of that type of capital in the optimal, or target, capital structure. The after-tax cost of debt, rd(1 - T), is the relevant cost to the firm of new debt financing. Since interest is deductible from taxable income, the after-tax cost of debt to the firm is less than the before-tax cost. Thus, rd(1 - T) is the appropriate component cost of debt (in the weighted average cost of capital). b. The cost of preferred stock , r ps , is the cost to the firm of issuing new preferred stock. For perpetual preferred, it is the preferred dividend, D ps , divided by the net issuing price, P n . Note that no tax adjustments are made when calculating the component cost of preferred stock because, unlike interest payments on debt, dividend payments on preferred stock are not tax deductible. The cost of new common equity
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/15/2011 for the course FI515 FI515 taught by Professor Fi515 during the Spring '10 term at Keller Graduate School of Management.

Ask a homework question - tutors are online