Lecture_13_ - 2-1Lecture#13•WACC•Optimal Capital...

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Unformatted text preview: 2-1Lecture#13•WACC•Optimal Capital Structure 2-2The Weighted Average Cost of Capital•The Weighted Average Cost of Capital is given by:WACC= Equity/Value x RE+ Debt/Value x RDx (1-TC)•Because interest expense is tax-deductible, we 2-3Cost of Preferred Stock•Preferred stock is a perpetuity, so its price is equal to the coupon paid divided by the current required return•Rearranging, the cost of preferred stock is:2-4The Weighted Average Cost of CapitalThe Weighted Average Cost of Capital with preferred stock:E/(E+D+P) x RE+ D/(E+D+P) x RD(1-TC) + P/(E+D+P) x RP2-5Capital Structure, Cost of Capital, and the Value of the FirmWhat is the optimal capital structure?–Optimal capital structure– the debt/equity ratio that maximizes total value of the firm–Optimal capital structure – the debt/equity ratio that minimizes the WACC2-6M&M Propositions•Financial leverage and firm value: PropositionI–With the absence of Taxes Capital restructurings don’t create valueVL= VUAnd 2-7...
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This note was uploaded on 07/04/2011 for the course FINA 463 taught by Professor Tsyplakov during the Fall '10 term at South Carolina.

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Lecture_13_ - 2-1Lecture#13•WACC•Optimal Capital...

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