Lecture 9: Cost of Capital

Dec 30, 2012

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2. Cost of Capital. Definitionis concerned with what a firm has to pay for the capital it uses to finance new investments. In other words, it is a return required by investors.. 3. Factors influencing the cost of capital. General economic conditions determines the supply and demand of capital wi

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Lecture 9: Cost of Capital

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Cost of Capital

Cost of Capital. What Number Goes in the Denominator?. Discount Rate (a.k.a. Cost of Capital, or the Interest Rate). Rate at which you can move money of similar risk through time.

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CHAPTER 9: The Cost of Capital

CHAPTER 9: The Cost of Capital. Cost of Capital Components Debt Preferred Common Equity WACC. What types of long-term capital do firms use?. Long-term debt Preferred stock Common equity. Capital Components. Capital components are sources of funding that come from investors.

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CHAPTER 9 The Cost of Capital

CHAPTER 9 The Cost of Capital. Cost of Capital Components Debt Preferred Common Equity WACC. What types of long-term capital do firms use?. Long-term debt Preferred stock Common equity. Capital components are sources of funding that come from investors.

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CHAPTER 9 The Cost of Capital

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CHAPTER 9 The Cost of Capital

CHAPTER 9 The Cost of Capital. Sources of capital Component costs WACC Adjusting for flotation costs Adjusting for risk. What sources of long-term capital do firms use?. Calculating the weighted average cost of capital. WACC = w d k d (1-T) + w p k p + w c k s

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CHAPTER 9 The Cost of Capital

CHAPTER 9 The Cost of Capital. Sources of capital Component costs WACC Adjusting for flotation costs Adjusting for risk. What sources of long-term capital do firms use?. Cost of Capital.

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CHAPTER 9 The Cost of Capital

CHAPTER 9 The Cost of Capital. Problem solving. Problem 1:. Your company’ stock sells for $50 per share, its last dividend was $2, its growth rate is a constant 5%, and the company will incur a flotation cost of 15% if it sells new common stock. What is the firm’s cost of new equity?.

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CHAPTER 9 The Cost of Capital

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Cost of Capital

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