Cost of Capital参考.ppt

Cost of Capital 11 Chapter 11 - Outline Cost of Capital Cost of Debt Cost of Preferred Stock Cost of Common Equity: Common Stock Retained Earnings Optimum Capital Structure Marginal Cost of Capital The Security of Market Line Summary and Conclusions Cost of Capital The cost of capital represents the overall cost of future financing to the firm The cost of capital is normally the relevant discount rate to use in analyzing an investment It represents the minimal acceptable return from the investment If your cost of funds is 10%, you must earn at least 10% on your investments to break even! The cost of capital is a weighted average of the various sources of funds in the form of debt and equity WACC = Weighted Average Cost of Capital Steps in measuring a firm’s cost of capital 1. Compute the cost of each source of capital. 2. Assign weights to each source. Conversion of historical cost of capital structure to market values may be required. 3. Compute the weighted average of the component costs. Cost of Capital – Baker Corporation Cost of Debt Measured by interest rate, or yield, paid to bondholders Example: $1,000 bond paying $100 annual interest – 10% yield Calculation is complex discount rate or premium from par value bonds To determine the cost of a new debt in the marketplace: The firm will compute the yield on its currently outstanding debt Approximate Yield to Maturity (Y) Annual interest payment + Number of years to maturity 0.6 (Price of the bond) + 0.4 (Principal payment) Assuming: Y = $101. 50 + 20 .6 ($940) + .4 ($1,000) = $101.50 + 20 $