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L_18_ - Outline Lecture 18 Organization Cost of Capital...

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Outline Lecture 18 Organization Cost of Capital WACC
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THE COST OF CAPITAL: Basic Ideas Cost of capital is the required rate of return (or appropriate discount rate) . Cost of Capital (Required Rate of Return) ______ for debt and equity financing due to different riskiness.
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The Cost of Capital: Cost of Equity The return that investors require for the equity financing can be estimated by one of the two models: CAPM approach Dividend Growth Model Approach
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The Costs of Debt Cost of debt is the return that investors (lenders) require on (their) debt financing? The cost of debt R D , ________ The rate the firm borrowed in the past history is ________
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The Weighted Average Cost of Capital The weighted average cost of capital ( WACC) —is The WACC is the ______ Capital structure weights 1. 2. So the firm’s capital structure weights are ________.
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The Weighted Average Cost of Capital 3. Interest payments on debt are tax-deductible, so the aftertax cost of debt is______ Aftertax cost of debt = where T c is the corporate tax rate 4.Thus the weighted average cost of capital is WACC =
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