| | - CHAPTER 10
- What sources of long-term capital do firms use?
- Calculating the weighted average cost of capital
- Should our analysis focus on before-tax or after-tax capital costs?
- Should our analysis focus on historical (embedded) costs or new (marginal) costs?
- How are the weights determined?
- Component cost of debt
- A 15-year, 12% semiannual coupon bond sells for $1,153.72. What is the cost of debt (rd)?
- Component cost of debt
- Component cost of preferred stock
- What is the cost of preferred stock?
- Is preferred stock more or less risky to investors than debt?
- Why is the yield on preferred stock lower than debt?
- Component cost of equity
- Why is there a cost for retained earnings?
- Three ways to determine the cost of common equity, rs
- If the rRF = 7%, RPM = 6%, and the firm’s beta is 1.2, what’s the cost of common equity based upon the CAPM?
- If D0 = $4.19, P0 = $50, and g = 5%, what’s the cost of common equity based upon the DCF approach?
- What is the expected future growth rate?
- Can DCF methodology be applied if growth is not constant?
- If rd = 10% and RP = 4%, what is rs using the own-bond-yield-plus-risk-premium method?
- What is a reasonable final estimate of rs?
- Why is the cost of retained earnings cheaper than the cost of issuing new common stock?
- If issuing new common stock incurs a flotation cost of 15% of the proceeds, what is re?
- Flotation costs
- Ignoring flotation costs, what is the firm’s WACC?
- What factors influence a company’s composite WACC?
- Should the company use the composite WACC as the hurdle rate for each of its projects?
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