Stockholdersfocusonatcfsthereforewe

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Unformatted text preview: e The k’s refer to the cost of each component. Should our analysis focus on before­tax Should our analysis focus on before­tax or after­tax capital costs? Stockholders focus on A­T CFs. Therefore, we should focus on A­T capital costs We are concerned with after­tax cash flows, so we need to consider the effect of taxes on the various costs of capital Interest expense reduces our tax liability This reduction in taxes reduces our cost of debt After­tax cost of debt = RD(1­TC) Dividends are not tax deductible, so there is no tax impact on the cost of equity Should our analysis focus on historical 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). How are the weights determined? How are the weights determined? WACC = wdkd(1­T) + wpkp + wsks Use accounting numbers or market value (book vs. market weights)? Use actual...
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