Chapter 10 - Slides - CHAPTER 10 THE COST OF CAPITAL Topics Overview Cost of Debt Cost of Preferred Stock Cost of Retained Earnings Cost of New Common

Chapter 10 - Slides - CHAPTER 10 THE COST OF CAPITAL Topics...

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CHAPTER 10 THE COST OF CAPITAL Topics: Overview Cost of Debt Cost of Preferred Stock Cost of Retained Earnings Cost of New Common Stock Weighted Average Cost of Capital Issues with WACC
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Overview When companies issue stocks or bonds, they are raising capital that can be invested in various projects Capital is a necessary factor of production and has a cost This cost is equal to the investor’s required return on the security in question For example, consider a bond From the investors perspective, a certain return is required given the risk and price From the companies perspective, a certain cost is paid so that investors buy their debt
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Overview The firm’s primary financial objective is to maximize shareholder value Companies can increase shareholder value by investing in projects that earn more than the cost of capital For example, if a project earns 20% but the capital invested in it costs 10%, accepting the project will increase the firm’s value and thus its stock price
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Overview Capital is obtained in three primary forms Debt Preferred stock Common Equity Capital Debt Notes Payable Long-Term Debt Preferred Stock Common Equity Retained Earnings New Common Stock
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