MD. FARHADUL ISLAM ID : WELCOME TO THE PRESENTATION

Cost of Capital

 The rate of return required by the market suppliers of capital to attract their funds to the firm  Used to decide whether a proposed corporate investment will increase or decrease the firm’s stock price.  Investments that are expected to increase : NPV>0 or IRR>Cost of Capital Cost of Capital

Key Assumptions Being unable to cover operating costs. Business Risk Being unable to cover required financial obligations. Financial Risk Net cash outflow resulting from a tax deductible cash expense after income tax effects have been considered. After tax costs

Sources of Capital Long- term debt Preferred stock Common stock Retained earnings

Cost of long-term debt  Before –tax, K d =  After-tax, K a =K d ×(1- T ) Example, K d = K a =9.4%×(1-.40)=5.6%

Cost of Preferred tock K p = D P = Annual preferred stock dividend N p = Net proceeds from the sale of the preferred stock

Constant growth Valuation Model Capital Asset Pricing Model (CAPM) K e = k f + (k m -k f ) b K f = Risk free rate of return K m = Market return b = Beta coefficient Cost of Common Stock K e = (D 1 /P 0 ) + g P o = value of common stock D 1 = per share dividend expected at the end of year g = constant rate of growth in dividends

Cost of New Issue of Common Stock K n = (D 1 /N n ) + g D 1 = per share dividend expected at the end of year N n = Market price of equity – flotation cost - underpricing

Cost of Retained Earnings K r = K e =(D 1 /P 0 ) + g K r =Cost of retained earnings

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