Topic 8(Chapter 6) The Cost of Capital6章 财务管理英文版教学课件 大学二年级下学期用.ppt

Topic 8(Chapter 6)The Cost of Capital Cost of Capital Components Debt Preferred Common Equity WACC What types of long-term capital do firms use? Long-term debt Preferred stock Common equity Should we focus on before-tax or after-tax capital costs? Should we focus on historical (embedded) costs or new (marginal) costs? A 15-year, 12% semiannual bond sells for $1,153.72. What’s kd? Component Cost of Debt Interest is tax deductible, so kd AT = kd BT(1 - T) = 10%(1 - 0.40) = 6%. Use nominal rate. Flotation costs small, so ignore. Example NCC can borrow at an interest rate of 11 percent,and it has a marginal federal-plus-state tax rate of 40 percent. Then its after-tax cost of debt is: Flotation Costs, ,and the Component Cost of Debt, Example NCC’s preferred stock pays a $10 dividend per share and sells for $100 per share.Flotation cost of new issued shares of preferred stock is 2.5 percent,or $2.5 per share. Question:NCC’s cost of preferred stock? What’s the cost of preferred stock? PP = $113.10; 10%Q; Par = $100; F = $2. Picture of Preferred Note: Flotation costs for preferred are significant, so are reflected. Use net price. Preferred dividends are not deductible, so no tax adjustment. Just kps. Nominal kps is used. Is preferred stock more or less risky to investors than debt? More risky; company not required to pay preferred dividend. However, firms want to pay preferred dividend. Otherwise, (1) cannot pay common dividend, (2) difficult to raise additional funds, and (3) preferred stockholders may gain control of firm. Why is yield on preferred lower than kd? Corporations own most preferred stock, because 70% of preferred dividends are nontaxable to corporations. Therefore, preferred often has a lower B-T yield than the B-T yield on debt. The A-T yield to investors and A-T cost to the issuer are higher on preferred than on debt, which is consistent with the higher risk of preferred. Example: What are the two ways that companies can raise common