The document discusses cost of capital concepts including the weighted average cost of capital (WACC), capital structure, and how to calculate WACC. It provides examples of calculating WACC given different capital structures consisting of debt, preferred stock, and common equity. Key points include that WACC is a weighted average of the costs of different sources of capital, adjusted for tax benefits of debt. It also notes WACC should only be used to discount projects similar to a firm's existing business.
The document discusses cost of capital concepts including the weighted average cost of capital (WACC), capital structure, and how to calculate WACC. It provides examples of calculating WACC given different capital structures consisting of debt, preferred stock, and common equity. Key points include that WACC is a weighted average of the costs of different sources of capital, adjusted for tax benefits of debt. It also notes WACC should only be used to discount projects similar to a firm's existing business.
The document discusses cost of capital concepts including the weighted average cost of capital (WACC), capital structure, and how to calculate WACC. It provides examples of calculating WACC given different capital structures consisting of debt, preferred stock, and common equity. Key points include that WACC is a weighted average of the costs of different sources of capital, adjusted for tax benefits of debt. It also notes WACC should only be used to discount projects similar to a firm's existing business.
The document discusses cost of capital concepts including the weighted average cost of capital (WACC), capital structure, and how to calculate WACC. It provides examples of calculating WACC given different capital structures consisting of debt, preferred stock, and common equity. Key points include that WACC is a weighted average of the costs of different sources of capital, adjusted for tax benefits of debt. It also notes WACC should only be used to discount projects similar to a firm's existing business.
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Cost of capital
- The return the firm´s investors could expect to earn if they invested in securities with comparable degrees of risk.
Capital structure - The mix of long-term debt and equity financing.
Capital structure decisions refer to the:
-blend of equity and debt used by the firm.
Weighted Average Cost of Capital (WACC)
- The expected rate of return on a portfolio of all the firm´s securities, adjusted for tax savings due to interest payments.
Company cost of capital = Weighted average of debt and equity firms
Market value of debt $194 30%
Market value of equity $453 70% Market value of assets $647 100% WACC formula Debt 8% Equity 14% Portfolio return = (30% * 8%) + (70%*14%) = 12.2% 12.2% D/V = debt to value E/V = equity to value Interest is tax deductible. Given a 35% tax rate, debt only costs 5.2% (i.e. 8% *65%) WACC with preffered stock
