Chapter 12 - Cost of Capital Flashcards
the return an investor receives is the cost of that security to the company that issued it
cost of capital
the return common stock investors require on their investment in the firm
cost of equity
the return preferred stock investors require on their investment
cost of preferred stock
purpose of the cost of equity
every $1 in common stock equity is how much we are paying investors
Advantages of Dividend Growth Model to find Cost of Preferred Stock and Cost of Equity
simple model
Disadvantages of Dividend Growth Model to find Cost of Preferred Stock and Cost of Equity
Only applies to companies issuing dividends
dividends must be fixed (for preferred stock)
Dividends must be constant rate (common stock)
Estimated growth rates
fails to consider risk
the return lenders require on the firms debt
Cost of Debt
purpose of cost of debt
to see for every $1 in bonds, how much we pay our lenders
the cost of capital for the firm as a whole and can be interpreted as the required return on the overall firm
WACC