Chapter 10 The Cost of Capita1

Chapter 10 The Cost - Chapter 10 The Cost of Capital I Cost of Capital Cost of Capital Firms required rate of return Hurdle rate for new investment

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Chapter 10 The Cost of Capital I. Cost of Capital: Cost of Capital: Firm’s required rate of return Hurdle rate for new investment Firm’s opportunity cost of funds Capital – long-term funds that will be used to finance long-term projects Source of Capital: Long-term debt Issue common stock Issue preferred stock Retained earnings Cost of Capital – is the rate of return that a firm must earn on its investments to maintain its market value and attract needed funds II. Cost of Debt: Cost of Debt – is the after-tax cost of raising long-term funds through new borrowing Before-Tax Cost of Debt – is the interest rate the firm must pay on the new debt Step 1: find that bond issues yield to maturity: r d N PV = V B (current price) PMT = coupon payment (INT) FV = M (par value) CPT I/Y After-Tax Cost of Debt – is the relevant cost of new debt, taking into account the tax deductibility of interest; used to calculate the WACC Step 2: r
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This note was uploaded on 10/17/2011 for the course FINC 302 taught by Professor Lawrence during the Spring '11 term at Nicholls State.

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Chapter 10 The Cost - Chapter 10 The Cost of Capital I Cost of Capital Cost of Capital Firms required rate of return Hurdle rate for new investment

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