文档介绍：Chapter Fifteen Cost of Capital
Cost of Capital
Chapter
Fifteen
Key Concepts and Skills
Know how to determine a firm’s cost of equity capital
Know how to determine a firm’s cost of debt
Know how to determine a firm’s overall cost of capital
Understand pitfalls of overall cost of capital and how to manage them
Chapter Outline
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
Flotation Costs and the Weighted Average Cost of Capital
Why Cost of Capital Is Important
We know that the return earned on assets depends on the risk of those assets
The return to an investor is the same as the cost to pany
Our cost of capital provides us with an indication of how the market views the risk of our assets
Knowing our cost of capital can also help us determine our required return for capital budgeting projects
Required Return
The required return is the same as the appropriate discount rate and is based on the risk of the cash flows
We need to know the required return for an investment before we pute the NPV and make a decision about whether or not to take the investment
We need to earn at least the required return pensate our investors for the financing they have provided
Cost of Equity
The cost of equity is the return required by equity investors given the risk of the cash flows from the firm
There are two major methods for determining the cost of equity
Dividend growth model
SML or CAPM
The Dividend Growth Model Approach
Start with the dividend growth model formula and rearrange to solve for RE
Dividend Growth Model Example
Suppose that pany is expected to pay a dividend of $11>.50 per share next year. There has been a steady growth in dividends of % per year and the market expects that to continue. The current price is $25. What is the cost of equity?
Example: Estimating the Dividend Growth Rate
One method for estimatin