08-Cost-of-capital-FIN6406

08-Cost-of-capital-FIN6406 - Cost of Capital Cost of...

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Unformatted text preview: Cost of Capital Cost of Capital 11 The Cost of Capital n Cost of capital components l Debt l Preferred l Common equity n WACC n MCC n IOS Cost of Capital Cost of Capital 22 What sources of capital should be included in a firms WACC? n Long-term debt n Preferred stock n Common equity (including): l Retained earnings l New common stock Cost of Capital Cost of Capital 33 Stockholders focus on after-tax cash flows. Thus, focus on A-T capital costs , i.e., use A-T costs in WACC. Only Rd needs adjustment. Should we focus on before-tax or after-tax capital costs? Cost of Capital Cost of Capital 44 Should we focus on historical (embedded) costs or new (marginal) costs? The cost of capital is used primarily to make decisions which involve raising new capital. So, focus on todays marginal costs . Cost of Capital Cost of Capital 55 Cost of debt (Rd)? Coupon = 12% semi Price = $1,153.72; 15 years. 60 60 + 1,000 60 1 2 30 i = ? 30 -1153.72 60 1000 5.0% periodic x 2 = Rd = 10% N I/YR PV FV PMT-1,153.72 INPUTS OUTPUT Cost of Capital Cost of Capital 66 Component cost of Debt n Interest is tax deductible , so Rd AT = Rd BT(1 - T) = 10%(1 - 0.40) = 6% n Debt flotation costs small. Ignore. n May need to incorporate yield curve differences. Cost of Capital Cost of Capital 77 Whats the cost of preferred stock (Rps)? Use this formula: Rps = = = = 0.090 = 9.0% 0.1($100) $113.10 - $2.00 Dps Pnet $10 $111.10 Cost of Capital Cost of Capital 88 Note n Flotation costs for pfd. are significant , so are reflected. Use net price . n Preferred dividends are not deductible , so no tax adjustment. Just Rps. n Nominal Rps is used. l Capital budgeting CFs are nominal . l Use nominal values for component costs. Cost of Capital Cost of Capital 99 Is preferred stock more or less risky to investors than debt?...
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This note was uploaded on 09/23/2011 for the course FIN 6406 taught by Professor Sturm,r during the Spring '08 term at University of Central Florida.

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08-Cost-of-capital-FIN6406 - Cost of Capital Cost of...

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