Beruflich Dokumente
Kultur Dokumente
The Cost
of Capital
Learning Goals
LG1 Understand the basic concept and sources of
capital associated with the cost of capital.
LG2 Explain what is meant by the marginal cost of
capital.
LG3 Determine the cost of long-term debt, and
explain why the after-tax cost of debt is the
relevant cost of debt.
2012 Pearson Prentice Hall. All rights reserved.
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2.
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where
I = annual interest in dollars
Nd = net proceeds from the sale of debt (bond)
n = number of years to the bonds maturity
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The cost of preferred stock, rp, is the ratio of the preferred stock
dividend to the firms net proceeds from the sale of preferred stock.
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where
P0
D1
rs
g
=
=
=
=
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Matter of Fact
Retained Earnings vs. Reinvesting Earnings
Technically, if a stockholder received dividends and wished to
invest them in additional shares of the firms stock, he or she
would first have to pay personal taxes on the dividends and then
pay brokerage fees before acquiring additional shares.
By using pt as the average stockholders personal tax rate
and bf as the average brokerage fees stated as a percentage,
we can specify the cost of retained earnings, rr, as
rr = rs (1 pt) (1 bf).
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