liabilities & equityassets debt preferred stock $ bank 14% common stock 5% r.o.i. (cost of $)...
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Liabilities & Equity Assets Debt Preferred Stock $ Bank 14% Common Stock 5% R.O.I. (cost of $)
Total Liabilities = Total Assets & Equity
Chapter 10 Cost of Capital
Chapter 10 Cost of Capital
Capital Structure
$ %
Debt $50 50%
Preferred 30 30%
Common 20 20%
Total $100 100%
Chapter 10 Cost of Capital
Cost of $
$ % k (given)
Debt $50 50% 10%
Preferred 30 30% 12%
Common 20 20% 14%
Total $100 100%
Chapter 10 Cost of Capital
Wt’d Avg Cost
Cost of $ of Capital
$ % k (given) tax 40%
Debt $50 50% 10% 0.5(10%)x(1-tax)=3%
Preferred 30 30% 12% 0.3(12%) =3.6%
Common 20 20% 14% 0.2(14%) =2.8%
Total $100 100% WACC =9.4%
(1) Cost of Old Debt (Kd)
Kd
= interest
= 10
= 10%
principal 100(2) Cost of Old Preferred Stock (Kps)
Kps
= Dividend to P.S.
= 12
= 12% P.S. price 100(3) Cost of Old Common Stock (Ks)
Ks
= D1
+ g = 2
+ 4% = 14%
P0 20
Ks = Risk Free Rate + Risk Premium
For the following example...
FLOTATION COST
f = Flotation Cost = 5%
(1) Cost of New Debt (Kd)
Kd
= interest
= 10
= 10.53%
principal(1-f) 100(1-.05)
(2) Cost of New Preferred Stock (Kps)
Ks
=Dividend to P.S.
= 12
= 12.63%
P.S. price (1-f) 100(1-.05)
(3) Cost of New Common Stock (Ks)
Ks
= D1 + g =
2 + 4% = 14.53%
P0 (1-f) 20(1-.05)
Ks = Risk Free Rate + Risk Premium
Chapter 10 Cost of Capital
Wt’d Ave. Cost Cost of $ of Capital
$ % k (given) & tax @ 40%Debt $50 50% 10.53% 0.5(.1053)x(1-tax)=3.16%Pref. 30 30% 12.63% 0.3(.1263) =3.79%Comm. 20 20% 14.53% 0.2(.1453) =2.91%Total $100 100% WACC =9.86% Marginal Cost of Capital (MCC) = 9.86%
Percent
a = 16%
b = 14%
c = 12%
d = 8%IOS
WACC = 9.40%
WACC = 9.50%
WACC = 9.86%MCC
New capital raised & invested duringthe year
Optimal Capital Budget
WACC=weighted cost of capitalMCC=marginal cost of capitalIOS=investment opportunity schedule