Access over 35 million academic & study documents

Cost of Capital Paper

Content type
User Generated
Subject
Economics
Type
Worksheet
Rating
Showing Page:
1/5

Sign up to view the full document!

lock_open Sign Up
Showing Page:
2/5

Sign up to view the full document!

lock_open Sign Up
Showing Page:
3/5

Sign up to view the full document!

lock_open Sign Up
End of Preview - Want to read all 5 pages?
Access Now
Unformatted Attachment Preview
NOTE 10: COST OF CAPITAL  The Cost of Capital: Some Preliminaries  The Cost of Equity  The Costs of Debt and Preferred Stock  The Weighted Average Cost of Capital  Divisional and Project Costs of Capital I. The Cost of Capital: Issues 1. The following all mean the same thing: a. Required return b. Appropriate discount rate c. Cost of capital (or cost of money) 2. The cost of capital is an opportunity cost—it depends on where the money goes, not where it comes from. 3. For now, assume the firm’s capital structure (mix of debt and equity) is fixed. A.) The Dividend Growth Model Approach According to the constant growth model, P0 = D1 / (RE - g) Rearranging, RE = (D1 / P0) + g Example 1: Estimating the Dividend Growth Rate Year Dividend 1990 $4.00 1991 4.40 1992 4.75 1993 5.25 1994 5.65 Dollar Change Percentage Change B.) The SML Approach According to the CAPM: RE = Rf + β E x (RM - Rf) 1. Get the risk-free rate from financial press—many use the 1-year Treasury bill rate, say 5%. 2. Get estimates of market risk premium and security beta. a. Risk premium—historical 9.2% b. Beta—historical (1) Investment information services - e.g., S&P 1 (2) Estimate from historical data 3. Suppose the beta is 1.40, then, using the approach: RE = Rf + β E x (RM - Rf) II. Costs of Debt and Preferred Stock A.) Cost of debt 1. The cost of debt, RD, is the interest rate on new borrowing. 2. The cost of debt is observable ...
Purchase document to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
Goes above and beyond expectations!

Studypool
4.7
Indeed
4.5
Sitejabber
4.4

Similar Documents