Liabilities amp; EquityAssets Debt Preferred Stock $ Bank 14.ppt

Chapter 10 Cost of Capital Liabilities Equity Assets Debt Preferred Stock $ Bank 14% Common Stock 5% R.O.I. (cost of $) Total Liabilities = Total Assets Equity Chapter 10 Cost of Capital Capital Structure $ % Debt $50 50% Preferred 30 30% Common 20 20% Total $100 100% Chapter 10 Cost of Capital Cost of $ $ % k (given) Debt $50 50% 10% Preferred 30 30% 12% Common 20 20% 14% Total $100 100% Chapter 10 Cost of Capital Wt’d Avg Cost Cost of $ of Capital $ % k (given) tax 40% Debt $50 50% 10% 0.5(10%)x(1-tax)=3% Preferred 30 30% 12% 0.3(12%) =3.6% Common 20 20% 14% 0.2(14%) =2.8% Total $100 100% WACC =9.4% (1) Cost of Old Debt (Kd) Kd = interest = 10 = 10% principal 100 (2) Cost of Old Preferred Stock (Kps) Kps = Dividend to P.S. = 12 = 12% P.S. price 100 (3) Cost of Old Common Stock (Ks) Ks = D1 + g = 2 + 4% = 14% P0 20 Ks = Risk Free Rate + Risk Premium For the following example... FLOTATION COST f = Flotation Cost = 5% (1) Cost of New Debt (Kd) Kd = interest = 10 = 10.53% principal(1-f) 100(1-.05) (2) Cost of New Preferred Stock (Kps) Ks =Dividend to P.S. = 12 = 12.63% P.S. price (1-f) 100(1-.05) (3) Cost of New Common Stock (Ks) Ks = D1 + g = 2 + 4% = 14.53% P0 (1-f) 20(1-.05) Ks = Risk Free Rate + Risk Premium Chapter 10 Cost of Capital Wt’d Ave. Cost