BIS3589_ch10 - Chapter10 CostofCapital Costofcapital...

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Chapter 10 Cost of Capital
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Cost of capital The company’s required return on investment Hurdle rate All projects must earn a rate of return (IRR, MIRR)  higher than this hurdle rate
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Cost of capital 3 main source of capital Debt Preferred Stock Common Equity Common Stock Retained Earning
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WACC Weighted average cost of capital The appropriate hurdle rate should not be cost of any  single source of capital  We should use weighted average
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WACC Why use WACC? To maintain current capital structure Company has their own target optimal structure
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Cost of preferred Stock V p   = k p D K p   = V p D V p price of preferred stock (value) D Annual dividend K p Cost of preferred stock
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Flotation Cost Cost of issuing new security When company issue new security, they do not get full  price but net price Net price = full price – flotation cost
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K p   = V - F c D V
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This note was uploaded on 01/11/2012 for the course FINANCE fin 3701 taught by Professor Tengihla during the Spring '11 term at Assumption College.

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BIS3589_ch10 - Chapter10 CostofCapital Costofcapital...

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