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1、 Irwin McGraw Hill Chapter11 FundamentalsofCorporateFinanceThirdEdition TheCostofCapital BrealeyMyersMarcusslidesbyMatthewWill Irwin McGraw Hill TheMcGraw HillCompanies Inc 2001 TopicsCovered Geothermal sCostofCapitalWeightedAverageCostofCapital WACC CapitalStructureRequiredRatesofReturnBigOil sWACC
2、InterpretingWACCFlotationCosts CostofCapital CostofCapital Thereturnthefirm sinvestorscouldexpecttoearniftheyinvestedinsecuritieswithcomparabledegreesofrisk CapitalStructure Thefirm smixoflongtermfinancingandequityfinancing CostofCapital ExampleGeothermalInc hasthefollowingstructure Giventhatgeother
3、malpays8 fordebtand14 forequity whatistheCompanyCostofCapital CostofCapital Example GeothermalInc hasthefollowingstructure Giventhatgeothermalpays8 fordebtand14 forequity whatistheCompanyCostofCapital CostofCapital Example GeothermalInc hasthefollowingstructure Giventhatgeothermalpays8 fordebtand14
4、forequity whatistheCompanyCostofCapital CostofCapital Example GeothermalInc hasthefollowingstructure Giventhatgeothermalpays8 fordebtand14 forequity whatistheCompanyCostofCapital Interestistaxdeductible Givena35 taxrate debtonlycostsus5 2 i e 8 x 65 WACC WeightedAverageCostofCapital WACC Theexpected
5、rateofreturnonaportfolioofallthefirm ssecurities Companycostofcapital Weightedaverageofdebtandequityreturns WACC WACC ThreeStepstoCalculatingCostofCapital1 Calculatethevalueofeachsecurityasaproportionofthefirm smarketvalue 2 Determinetherequiredrateofreturnoneachsecurity 3 Calculateaweightedaverageo
6、ftheserequiredreturns WACC Taxesareanimportantconsiderationinthecompanycostofcapitalbecauseinterestpaymentsaredeductedfromincomebeforetaxiscalculated WACC Weighted averagecostofcapital WACC Example ExecutiveFruithasissueddebt preferredstockandcommonstock Themarketvalueofthesesecuritiesare 4mil 2mil
7、and 6mil respectively Therequiredreturnsare6 12 and18 respectively Q DeterminetheWACCforExecutiveFruit Inc WACC Example continuedStep1FirmValue 4 2 6 12milStep2RequiredreturnsaregivenStep3 WACC IssuesinUsingWACCDebthastwocosts 1 returnondebtand2 increasedcostofequitydemandedduetotheincreaseinriskBet
8、asmaychangewithcapitalstructureCorporatetaxescomplicatetheanalysisandmaychangeourdecision MeasuringCapitalStructure InestimatingWACC donotusetheBookValueofsecurities InestimatingWACC usetheMarketValueofthesecurities BookValuesoftendonotrepresentthetruemarketvalueofafirm ssecurities MeasuringCapitalS
9、tructure MarketValueofBonds PVofallcouponsandparvaluediscountedatthecurrentinterestrate MarketValueofEquity Marketpricepersharemultipliedbythenumberofoutstandingshares MeasuringCapitalStructure MeasuringCapitalStructure Ifthelongtermbondspayan8 couponandmaturein12years whatistheirmarketvalueassuming
10、a9 YTM MeasuringCapitalStructure RequiredRatesofReturn BondsCommonStock RequiredRatesofReturn DividendDiscountModelCostofEquityPerpetuityGrowthModel solveforre RequiredRatesofReturn ExpectedReturnonPreferredStockPriceofPreferredStock solveforpreferred FlotationCosts Thecostofimplementinganyfinancingdecisionmustbeincorporatedintothecashflowsoftheprojectbeingevaluated Onlytheincrementalcostsoffinancingshouldbeincluded ThisissometimescalledAdjustedPresentValue
