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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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*Sign up* 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

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.
•
Potential Solutions:

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