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CostofCapital - TheCostofCapital TheCostofCapital 280...

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The Cost of Capital FINC 3610 Yost The Cost of Capital 280 The Cost of Capital What are the sources of capital? What is the cost of capital? The cost of capital reflects the investment opportunities and alternatives in the financial market available to suppliers of the firm’s capital. 281 The Cost of Capital Which cost of capital? How do we calculate the cost of capital? 282
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The Cost of Capital FINC 3610 Yost The Cost of Common Stock There are two ways: 1. 2. 283 The Dividend Growth Model Recall: Therefore, R E is the required return on equity, or the cost of equity capital. 284 Dividend Growth Model Example Brian’s Burritos just paid a $2.00 dividend which it expects to grow at 5% dividend, which it expects to grow at 5% per year indefinitely. If the current price of this stock is $25, what is Brian’s cost of equity capital? 285
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The Cost of Capital FINC 3610 Yost The Dividend Growth Model Problem : We know what the price of the stock is today and we know what th t t di id d W the most recent dividend was. We seldom know the growth rate.
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