Chapter9THECOSTOFCAPITAL-Universityof.pptVIP

Capital components: debt, preferred stock, and common stock. Any increase in total assets must be financed by an increase in one or more of these capital components Kd: the interest rate on the firm’s new debt Kps: the cost of preferred stock Ks: the cost of retained earnings Ke:the cost of common equity equity obtained by issuing new common stock as apposed to retaining eanings 1. The cost of debt Kd 1-T is the after tax cost of debt. The relevant cost of new debt, taking into account the tax deductibility of interest. In effect, the government pays part of the cost of debt because inter