文档介绍：Irwin/McGraw-Hill
Chapter 11
Fundamentals of Corporate Finance
Third Edition
The Cost of Capital
Brealey Myers Marcus
slides by Matthew Will
Irwin/McGraw-Hill
The McGraw-panies, Inc.,2001
Topics Covered
Geothermal’s Cost of Capital
Weighted Average Cost of Capital ()
Capital Structure
Required Rates of Return
Big Oil’s
Interpreting
Flotation Costs
Cost of Capital
Cost of Capital - The return the firm’s investors could expect to earn if they invested in securities parable degrees of risk.
Capital Structure - The firm’s mix of long term financing and equity financing.
Cost of Capital
Example
Geothermal Inc. has the following structure. Given that geothermal pays 8% for debt and 14% for equity, what is pany Cost of Capital?
Cost of Capital
Example - Geothermal Inc. has the following structure. Given that geothermal pays 8% for debt and 14% for equity, what is pany Cost of Capital?
Cost of Capital
Example - Geothermal Inc. has the following structure. Given that geothermal pays 8% for debt and 14% for equity, what is pany Cost of Capital?
Interest is tax deductible. Given a 35% tax rate, debt only costs us % (. 8 % x .65).
Weighted Average Cost of Capital () - The expected rate of return on a portfolio of all the firm’s securities.
Company cost of capital = Weighted average of debt and equity returns.
Three Steps to Calculating Cost of Capital
1. Calculate the value of each security as a proportion of the firm’s market value.
2. Determine the required rate of return on each security.
3. Calculate a weighted average of these required returns.