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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)?
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- Winter '14