清华大学公司财务讲义6.pptVIP

* chaper3 mathematics of finance * Example: (continued) Using these data, we could estimate the risk premium of an average stock over an average bond to be 14.0% - 10.2% = 3.8% We would estimate that the premium an average stock over our own bond was somewhat between 3.3 and 4.3 percent points. * chaper3 mathematics of finance * Example: (continued) NCC has been experiencing some problems from low-cost foreign producers, and its bonds are rated Baa. Therefore NCC’s bond is relatively risky, and it yielded 11.0%. So we would determine the high and low value of NCC’s cost of equity as follows: low: kNCC=11.0%+3.3%=14.3% high: kNCC=11.0%+4.3%=15.3% * chaper3 mathematics of finance * Cost of Newly Issued Common Equity The sale of new common equity, as with the sale of preferred stock and debt, involves floatation cost. These costs lower the net usable dollars produced by new stock issues. * chaper3 mathematics of finance * Formula: * chaper3 mathematics of finance * Example: For NCC, D1=$2.40, F=15%, P0=$32, g=6.5% * chaper3 mathematics of finance * Weighted Average Cost of Capital General Formula for WACC WACC = Ka = WdKd(1-T) + WpKp + Ws(Ks or Ke) Target Capital Structure (Selection of Capital Structure Weights) * chaper3 mathematics of finance * Target Capital Structure Each firm has in mind a target capital structure, defined as the mix of debt, preferred and common equity, which causes its stock price to be maximized. When the firm raises new capital, it generally tries to finance so as to keep the actual capital structure reasonably close to the target over time. * chaper3 mathematics of finance * Several Other Selections Accounting Values Market Values Target Values Correct weights are target values. * chaper3 mathematics of finance * Marginal Cost of Capital For capital budgeting purpose, the WACC refers to the weighted average cost of each new dollar of capital raised at the margin. It is not the average cost of all dollars the firm has raised in the