ch 10 - Chapter10 TheCostofCapital SourcesofCapital...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
The Cost of Capital Chapter 10 Sources of Capital  Component Costs WACC Adjusting for Flotation Costs Adjusting for Risk 10-1
Background image of page 1

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

View Full Document Right Arrow Icon
What sources of long-term capital do  firms use? 10-2
Background image of page 2
Calculating the Weighted Average Cost  of Capital WACC = w d r d (1 – T) + w p r p  + w c r s   The w’s refer to the firm’s capital structure  weights. The r’s refer to the cost of each component. 10-3
Background image of page 3

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

View Full Document Right Arrow Icon
Should our analysis focus on before-tax or  after-tax capital costs? Stockholders focus on A-T CFs.  Therefore,  we should focus on A-T capital costs, i.e. use  A-T costs of capital in WACC.  Only r d  needs  adjustment, because interest is tax  deductible. 10-4
Background image of page 4
Should our analysis focus on historical  (embedded) costs or new (marginal) costs? The cost of capital is used primarily to make  decisions that involve raising new capital.  So,  focus on today’s marginal costs (for WACC). 10-5
Background image of page 5

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

View Full Document Right Arrow Icon
How are the weights determined? WACC =  w d r d (1 – T) +  w p r p  +  w c r s   10-6 Use accounting numbers or market value  (book vs. market weights)? Use actual numbers or target capital  structure?
Background image of page 6
Component Cost of Debt WACC = w d r d (1   T)  + w p r p  + w c r s   10-7 r d  is the marginal cost of debt capital. The yield to maturity on outstanding L-T debt  is often used as a measure of r d . Why tax-adjust; i.e., why r d (1 – T)?
Background image of page 7

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

View Full Document Right Arrow Icon
for $1,153.72.  What is the cost of debt (r d )? Remember, the bond pays a semiannual 
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 27

ch 10 - Chapter10 TheCostofCapital SourcesofCapital...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online