51285128 s wddv47597548724872 costofdebt costofdebt

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Unformatted text preview: numbers or target capital structure? Example: Capital Structure Example: Capital Structure Weights Suppose you have a market value of equity equal to $500 million and a market value of debt = $475 million. What are the capital structure weights? V = 500 million + 475 million = 975 million w = E/V = 500 / 975 = .5128 = 51.28% s wD = D/V = 475 / 975 = .4872 = 48.72% Cost of Debt Cost of Debt The cost of debt is the required return on our company’s debt We usually focus on the cost of long­term debt or bonds The required return is best estimated by computing the yield­to­maturity on the existing debt the yield that investors demand to hold the firm’s debt (new or existing). The cost of debt is NOT the coupon rate Example 1: Cost of Debt Example 1: Cost of Debt A 15­year, 12% semiannual coupon bond sells for $1,153.72. What is the cost of debt (kd)? Remember, the bond pays a semiannual coupon, so kd = 5.0% x 2 = 10%. INPUTS 30 N OUTPUT -1153.72 I/YR 5 60 1000 PV PMT FV Component cost of debt Co...
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