Chapter 7: Cost of Capital Flashcards
The minimum rate of return that must be made on an investment to maintain the market value of the firm’s securities or also known as the firm’s minimum required rate of return
Cost of Capital
Components of Capital
- Retained Earnings
- Common Stocks
- Preferred Stocks
- Bonds
It measures the current cos of the firm to finance its projects
Cost of Debt
It measures the cost of financing through the issuance of preferred shares of stock
Cost of Preferred Stock
Firm who want to raise capital may opt issue common stocks instead of long-term bonds or preferred stocks
Cost of Common Stock
Also known as the constant dividend growth model
Gordon’s Growth Model
If a firm decides to issue new shares of stock in the form of common stocks, a variable will be added in what is termed as a flotation cost which is the cost of issuing additional shares of stock
Issuance of New Common Stock
is used to finance to theoretically determine the appropriate required rate of return of an asset
Capital Asset Pricing Model
It measures the votality of an asset return
Beta
another model in estimating the cost of quity
Bond Plus Approach
this portion of the net income is a source of internal financing
Cost of Retained Earnings
it is the overall cost a firm ahould consider before undertaking an investment decision
weighted Average Cost of Capital
it assumes that new finances will be raised using the stated values on the firm’s current capital structure
Book Value Weights
it is obtained by dividing the market value of each of component of the capital structure of the firm by its overall or total market value
Market Value Weights
firm has already settled or is able to determine what capital structure maximizes its value
Target
