Cost Of Capital (L7) Flashcards
Cost of capital
Return required by investors for investing in the firm (opp cost)
Equity/debt/retained earning to finance capital
Cost of capital
Total required income/ value of investment
(Dxrd) + (Exre)/ v
Weighted average cost of debt and cost of equity WACC
D/V x cost of debt + E/V x cost of equity
Cost of debt
Interest rate from finding bonds yield formula
Coupon/1+y =price
Interest paid is tax deductible
Tax liability for income
Rev-expenses x tax - tax x interest
Divide by debt for cost of debt
After tax Cost of debt
(1-Tc) x rdebt
Cost of equity using CAPM
requity = rf + B(rm-rf)
rf (risk free return) rm=market excess return/market risk premium
Cost/price of preferred stock
May be used to finance
Dividend/preferred =price of preferred stock
Rpreferred= cost of preferred stock
Rdebt
Bonds yield/bank interest rate
WACC with preferred stock
D/V X rdebt + E/V X requity + P/V X rpreferred equity
Market value of Equity using book value equity
Book value/ value per share x market price of each share
Use book value for debt
Why is WACC used
Value new projects related to existing operations (average risk)
Perpetual NPV
PV of investment - cost
PV = perpetual value
