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1、CHAPTER10TheCostofCapitalCostofcapitalcomponentsAccountingforflotationcostsWACCAdjustingcostofcapitalforriskEstimatingprojectriskWhattypesofcapitaldofirmsuse?DebtPreferredstockCommonequity:RetainedearningsNewcommonstockStockholdersfocusonA-TCFs.Therefore,weshouldfocusonA-Tcapitalcosts,i.e.,useA-Tcos
2、tsinWACC.Onlykdneedsadjustment.Shouldwefocusonbefore-taxorafter-taxcapitalcosts?Thecostofcapitalisusedprimarilytomakedecisionsthatinvolveraisingnewcapital.So,focusontoday’smarginalcosts(forWACC).Shouldwefocusonhistorical(embedded)costsornew(marginal)costs?A15-year,12%semiannualbondsellsfor$1,153.72.
3、What’skd?6060+1,0006001230i=?30-1153.726010005.0%x2=kd=10%NI/YRPVFVPMT-1,153.72...INPUTSOUTPUTComponentCostofDebtInterestistaxdeductible,sokdAT=kdBT(1–T)=10%(1–0.40)=6%.Usenominalrate.Flotationcostssmall.Ignore.What’sthecostofpreferredstock? Pp=$111.10;10%Q;Par=$100.Usethisformula:PictureofPreferred
4、Stock2.502.50012kp=?-111.1¥...2.50$111.10==.kPer==2.25%;kp(Nom)=2.25%(4)=9%.DQkPer$2.50kPer$2.50$111.10Note:Preferreddividendsarenottaxdeductible,sonotaxadjustment.Justkp.Nominalkpisused.Ourcalculationignoresflotationcosts.Ispreferredstockmoreorlessriskytoinvestorsthandebt?Morerisky;companynotrequir
5、edtopaypreferreddividend.However,firmstrytopaypreferreddividend.Otherwise,(1)cannotpaycommondividend,(2)difficulttoraiseadditionalfunds,(3)preferredstockholdersmaygaincontroloffirm.Whyisyieldonpreferredlowerthankd?Corporationsownmostpreferredstock,because70%ofpreferreddividendsarenontaxabletocorpora
6、tions.Therefore,preferredoftenhasalowerB-TyieldthantheB-Tyieldondebt.TheA-Tyieldtoaninvestor,andtheA-Tcosttotheissuer,arehigheronpreferredthanondebt.Consistentwithhigherriskofpreferred.Example:kp=9%kd=10%T=40%kp,AT=kp–kp(1–0.7)(T)=9%–9%(0.3)(0.4)=7.92%.kd,AT=10%–10%(0.4)=6.00%.A-TRiskPremiumonPrefer
7、red=1.92%.Whyisthereacostforretainedearnings?Earningscanbereinvestedorpaidoutasdividends.Investorscouldbuyothersecurities,earnareturn.Thus,thereisanopportunitycostifearningsareretained.Opportunitycost
