08-Cost-of-capital

# 08-Cost-of-capital - The Cost of Capital Cost of capital...

This preview shows pages 1–10. Sign up to view the full content.

Cost of Capital 1 The Cost of Capital Cost of capital components Debt Preferred Common equity WACC MCC IOS

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Cost of Capital 2 What sources of capital should be included in a firm’s WACC? Long-term debt Preferred stock Common equity (including): Retained earnings New common stock
Cost of Capital 3 Stockholders focus on after-tax cash flows. Thus, focus on A-T capital costs , i.e., use A-T costs in WACC. Only R d needs adjustment. Should we focus on before-tax or after-tax capital costs?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Cost of Capital 4 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 today’s marginal costs .
Cost of Capital 5 Cost of debt (R d )? Coupon = 12% semi Price = \$1,153.72; 15 years. 60 60 + 1,000 60 0 1 2 30 i = ? 30 -1153.72 60 1000 5.0% periodic x 2 = R d = 10% N I/YR PV FV PMT -1,153.72 INPUTS OUTPUT

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Cost of Capital 6 Component cost of Debt Interest is tax deductible, so R d AT = R d BT (1 - T) = 10%(1 - 0.40) = 6% Debt flotation costs small. Ignore. May need to incorporate yield curve differences.
Cost of Capital 7 What’s the cost of preferred stock (R ps )? P ps = \$113.10; 10%Q; Par = \$100; F = \$2 Use this formula: R ps = = = = 0.090 = 9.0% 0.1(\$100) \$113.10 - \$2.00 D ps P net \$10 \$111.10

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Cost of Capital 8 Note Flotation costs for pfd. are significant, so are reflected. Use net price. Preferred dividends are not deductible, so no tax adjustment. Just R ps . Nominal R ps is used. Capital budgeting CFs are nominal. Use nominal values for component costs.
Cost of Capital 9 Is preferred stock more or less risky to investors than debt? More risky; company not required to

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 36

08-Cost-of-capital - The Cost of Capital Cost of capital...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online