1. Vocabulary—the following all mean the same: a. Required return

Slides:



Advertisements
Similar presentations
Chapter 13 Learning Objectives
Advertisements

The Cost of Capital: Some Preliminaries The Cost of Equity
Models and methods to estimate the appropriate r
McGraw-Hill/Irwin Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts & Skills Calculate & explain A firm’s cost of common equity capital A firm’s cost of preferred stock A firm’s cost of debt A firm’s overall.
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Cost of Capital Chapter 14 Notes to the Instructor:
Cost of Capital Problems
McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Cost of Capital Chapter 12.
Chapter 14 Cost of Capital Chapter Organization
Chapter 14 Cost of Capital Chapter Organization
Weighted Average Cost of Capital The market value of the firm is the present value of the cash flows generated by the firm’s assets: The cash flows generated.
15-0 Chapter 15: Outline The Cost of Capital: Some Preliminaries The Cost of Equity The Costs of Debt and Preferred Stock The Weighted Average Cost of.
Optimal Capital Structure The Cost of Capital Approach P.V. Viswanath Based on Damodaran’s Corporate Finance.
Cost of Capital (ch 14&15) The Cost of Capital: Overview
Chapter 11 Weighted Average Cost of Capital  The Cost of Capital  Components of the Cost of Capital  Weighting the Components  Adjusting the Debt Component.
12.0 Chapter 12 Cost of Capital Key Concepts and Skills Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost.
Chapter 10 – The Cost of Capital
Copyright: M. S. Humayun1 Financial Management Lecture No. 29 WACC (Weighted Average Cost of Capital) Batch 7-2.
Why Cost of Capital Is Important
Weighted Average Cost of Capital
13- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard.
Weighted Average Cost of Capital (WACC) Module 6.2 Copyright © 2013 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Chapter 12 Cost of Capital 0. Why Cost of Capital is Important Return is commensurate with Risk – always (SML) The cost of capital gives an indication.
Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.
Chapter 14 Cost of Capital 14.1The Cost of Capital: Some Preliminaries 14.2The Cost of Equity 14.3The Costs of Debt and Preferred Stock 14.4The Weighted.
Unit 7.
Cost of Capital 1The Cost of Capital: Some Preliminaries 2The Cost of Equity 3The Costs of Debt and Preferred Stock 4The Weighted Average Cost of Capital.
Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.
Key Concepts and Skills
Weighted Average Cost of Capital WACC Chapter - 12.
14-0 Cost of Capital Chapter 14 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
FIN 614: Financial Management Larry Schrenk, Instructor.
Cost of Capital Professor Ronald Miolla. Agenda 1) What is Cost of Capital? 2) How to compute Cost of Capital. 3) Cost of debt. 4) Cost of equity.
Exercises in Capital Structure and Cost of Capital
Cost of Capital FWhat is the appropriate discount rate? FCapital Structure involves the use of: F FOptimal Capital Structure:
T14.1 Chapter Outline Chapter 14 Cost of Capital Chapter Organization 14.1The Cost of Capital: Some Preliminaries 14.2The Cost of Equity 14.3The Costs.
Costs of Capital Weighted Average Cost of Capital (WACC)
1 資金成本 Cost of Capital. 2 Weighted average cost of capital (WACC). The discount rate used in the capital budgeting 1. Identify the components to be used.
13-1 Agenda for 3 August (Chapter 14) The Cost of Capital The Cost of Equity The Costs of Debt and Preferred Stock The Weighted Average Cost of Capital.
Financial Management FIN300 Cost of Capital. Objectives Upon completion of this lesson, you will be able to: –Determine a firm’s cost of equity capital.
Chapter 12 Cost of Capital!. Key Concepts and Skills Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost of debt.
Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Cost of Capital Cost of Capital - The return the firm’s.
3- 1 Outline 3: Risk, Return, and Cost of Capital 3.1 Rates of Return 3.2 Measuring Risk 3.3 Risk & Diversification 3.4 Measuring Market Risk 3.5 Portfolio.
UNIT 7 SEM PROBLEMS. What impacts the cost of capital? RISKINESS OF EARNING S THE DEBT TO EQUITY MIX OF THE FIRM FINANCIAL SOUNDNESS OF THE FIRM INTEREST.
Cost of Capital How much does it cost to borrow money? It depends on the source It depends on the source Mom and Dad – no interest, no principal repayment.
AcF 214 Tutorial Week 6.
1 FINC3131 Business Finance Chapter 10: The Cost of Capital.
COST OF CAPITAL. For Investors, the rate of return on a security is a benefit of investing. For Financial Managers, that same rate of return is a cost.
Chapter 12 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.
14-0 The Weighted Average Cost of Capital 14.4 We can use the individual costs of capital that we have computed to get our “average” cost of capital for.
RISK, COST OF CAPITAL, AND CAPITAL BUDGETING This topic applies the concept of NPV to risky cash flows. NPV = C o + Σ C t ¯ /(1+r) t r = discount rate.
Cost of Capital Chapter Fourteen. Prof. Oh, KUMBA 2010Ch14-1 Corporate Finance Key Concepts and Skills  Know how to determine a firm’s cost of equity.
BUS 401 Week 4 Quiz Check this A+ tutorial guideline at NEW/BUS-401-Week-4-Quiz 1.) Investors will make an investment.
Saba Soliman al-Mohawis
Session 8: DCF Valuation
Chapter 13 Learning Objectives
Cost of Capital Chapter 15 Reem Alnuaim.
Cost of capital Chapter 14 problems.
Chapter 13 The Weighted Average Cost of Capital and Company Valuation
Chapter 13 The Weighted Average Cost of Capital and Company Valuation
Cost of capital (Chapter 9)
Risk Measurement and the Cost of Capital
Chapter 14 Cost of Capital
Questions-Cost of Capital
The Weighted Average Cost of Capital and Company Valuation
Weighted Average Cost of Capital (Ch )
CHAPTER 9 The Cost of Capital
Presentation transcript:

1. Vocabulary—the following all mean the same: a. Required return Cost of Capital Key issues: What do we mean by “cost of capital” How can we come up with an estimate? 1. Vocabulary—the following all mean the same: a. Required return b. Appropriate discount rate c. Cost of capital (or cost of money) 2. Cost of capital is an opportunity cost—depends on where the money goes, not where it comes from. 3. For now, capital structure (debt/equity mix) is fixed.

Cost of Debt Cost of debt 1. Cost of debt, RD, is the interest rate on new borrowing. 2. Cost of debt is observable: a. Yield on currently outstanding debt. b. Yields on newly-issued similarly-rated bonds. 3. Historic debt cost is irrelevant.

What’s the YTM on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887? 90 1 9 10 kd=? PV1 . PV10 PVM 1,000 887 Find kd that “works”!

Find kd

Cost of Equity Capital: Expected Return on Stock: RE Models of Expected Returns CAPM: Expected return on stock i = Riskfree rate + (Beta of i with respect to Market)*(Expected return on Market - Riskfree rate) APT: Expected return on stock i = Riskfree rate + (Beta of i with respect to Factor 1)*(Expected return on Factor 1 - Riskfree rate) + (Beta of i with respect to Factor 2)*(Expected return on Factor 2 - Riskfree rate) + ...

Cost of Equity Capital: Expected Return on Stock: RE Models of Expected Returns Historical Industry Returns: Expected Return on stock i = Average historical return of other firms in the same industry as company i.

The Weighted Average Cost of Capital (WACC) Capital structure weights 1. Let: E = the market value of the equity. D = the market value of the debt. Then: V = E + D 1 = E/V + D/V = 100% 2. Thus, the firm’s capital structure weights are E/V and D/V.

The Weighted Average Cost of Capital (concluded) 3. Interest payments on debt are tax-deductible, so the after-tax cost of debt is the pretax cost multiplied by (1 - corporate tax rate). After-tax cost of debt = RD x (1 - Tc) 4. The weighted average cost of capital that we actually use is thus WACC = (E/V) x RE + (D/V) x RD x (1 - Tc)

) http://pages.stern.nyu.edu/~adamodar/ Updated Data