New Equity Issuance FCost of External Equity   Ex. Suppose Archer’s Aquarium Equipment may continue to issue unlimited amounts of common equity at a.

Slides:



Advertisements
Similar presentations
The Cost of Capital Omar Al Nasser, Ph.D. FIN 6352
Advertisements

Chapter 8 Cost of Capital
Goal of the Lecture: Understand how much a business must pay to raise the capital it needs to fund corporate investments.
CHAPTER 13 The Cost of Capital
1 Capital Budgeting Overview  Capital Budgeting is the set of valuation techniques for real asset investment decisions.  Capital Budgeting Steps estimating.
CHAPTER 09 Cost of Capital
Objectives Understand the basic concept and sources of capital associated with the cost of capital. Explain what is meant by the marginal cost of capital.
Chapter 11. Cost of Capital n Basic Skills: (Time value of money, Financial Statements) n Investments: (Stocks, Bonds, Risk and Return) n Corporate Finance:
Copyright © 2002 by Harcourt, Inc.All rights reserved. CHAPTER 10 The Cost of Capital Sources of capital Component costs WACC Adjusting for flotation.
Cost of Capital Minggu 10 Lecture Notes.
Chapter 11. Assets Liabilities & Equity Current assets Current Liabilities Long-term debt Long-term debt Preferred Stock Preferred Stock Common Equity.
10-1 Copyright (C) 2000 by Harcourt, Inc. All rights reserved. Chapter 10: The Cost of Capital Copyright © 2000 by Harcourt, Inc. All rights reserved.
CHAPTER 9 The Cost of Capital
BUA321 Chapter 9 Class notes Cost of capital. feature=player_detailpage&v=JKJ glPkAJ5o feature=player_detailpage&v=JKJ.
Why Cost of Capital Is Important
The Weighted Cost of Capital. Objectives n Define the concept of cost of capital. n Use the concept of cost of capital to link the investment decisions.
Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ.
Chapter 13 Cost of Capital
FIN 614: Financial Management Larry Schrenk, Instructor.
1 Cost of Capital Chapter Learning Objectives Learning Objectives  Explain the concept and purpose of determining a firm’s cost of capital.  Identify.
Cost of Capital = Asset Value CF 1 (1 + r) 1 ^ + CF 2 (1 + r) 2 ^ + … + CF n (1 + r) n ^ r = firm’s required rate of return, which represents the return.
Lecture No. 50 Chapter 15 Contemporary Engineering Economics Copyright © 2010 Contemporary Engineering Economics, 5th edition, © 2010.
Capital Budgeting Overview Capital Budgeting is the set of valuation techniques for real asset investment decisions. Capital Budgeting Steps estimating.
Chapter 9 The Cost of Capital.
Ch. 12 Cost of Capital  2002, Prentice Hall, Inc.
Cost of Capital By Prof. Manish B Tardeja. Liabilities & Equity Assets Equity Shares Current assets Preference Shares Long-term debt Fixed assets Fixed.
© 2004 by Nelson, a division of Thomson Canada Limited Contemporary Financial Management Chapter 8: The Cost of Capital.
Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 10 The Cost of Capital.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital 11.
Slide 1 Cost of Capital Basic Skills: (Time value of money, Financial Statements) Investments: (Stocks, Bonds, Risk and Return) Corporate Finance: (The.
Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 10 The Cost of Capital.
11 Chapter Cost of Capital Based on: Terry Fegarty Carol Edwards,
CHAPTER 9 The Cost of Capital
Chapter 9 - Cost of Capital Concept of the Cost of Capital Computing a Firm’s Cost of Capital Cost of Individual Sources of Capital Optimal Capital Structure.
Chapter 8 The Cost of Capital Fin 320 Dr. B. Asiri © 2005 Thomson/South-Western.
Ch 9. The Cost of Capital. Goals: To understand cost of capitals or hurdle rate To understand how to estimate cost components To understand how to estimate.
Unit 7.
The Cost of Capital Chapter 12. Cost of Capital uThe firm’s average cost of funds, which is the average return required by the firm’s investors uWhat.
9 - 1 © 1998 The Dryden Press CHAPTER 9 The Cost of Capital Cost of Capital Components Debt Preferred Common Equity WACC MCC IOS.
1. 2 Learning Outcomes Chapter 11 Compute the component cost of capital for (a) debt, (b) preferred stock, (c) retained earnings, and (d) new common equity.
Cost of Capital Chapter 10.
1 Capital Budgeting Overview  Capital Budgeting is the set of valuation techniques for real asset investment decisions.  Capital Budgeting Steps estimating.
Cost of Capital FWhat is the appropriate discount rate? FCapital Structure involves the use of: F FOptimal Capital Structure:
9-1 CHAPTER 11 The Cost of Capital Sources of capital Component costs WACC.
CHAPTER 4 Long-Term Financial Planning and Growth.
1 Chapter 11 Calculating the Cost of Capital McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2003 Pearson Education, Inc. Slide 10-0 Ch 10 Learning Goals 1.Concept of cost of capital 2.Determine the annual percentage cost of individual.
Copyright © 2003 Pearson Education, Inc. Slide 11-0 Chapter 11 The Cost of Capital.
101 EXAMPLE, Historical Weights, using Market Value Weights In addition to the data from Ex. 10.7, assume that the security market prices are as follows:
10-1 CHAPTER 10 The Cost of Capital Sources of capital Component costs WACC Adjusting for risk.
1 The Cost of Capital Corporate Finance Dr. A. DeMaskey.
Chapter 8 The Cost of Capital © 2005 Thomson/South-Western.
Chapter 11 Cost of Capital Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Chapter 11 Cost of Capital. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 11-1 TABLE 11-1 Cost of capital−Baker Corporation.
Cost of Capital. n For Investors the rate of return on a security is a benefit of investing. n For Financial Managers that same rate of return is a cost.
CHAPTER 9: THE COST OF CAPITAL. The Cost of Capital: 2.
Chapter 11 The Cost of Capital 1. Learning Outcomes Chapter 11  Compute the component cost of capital for (a) debt, (b) preferred stock, (c) retained.
THE COST OF CAPITAL. What sources of long-term capital do firms use? Long-Term Capital Long-Term Debt Preferred Stock Common Stock Retained Earnings New.
Cost of Capital 1. Hilliard Corp. wants to calculate its weighted average cost of capital (WACC). The company’s CFO has collected the following information:
Cost of Capital Raising funds to pay for capital projects.
Cost of Capital. n Financial Performance n Time value of money n Stocks and Bonds n Risk and Return n The Investment Decision (Capital Budgeting) (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.
Cost of Capital Chapter 12 © 2003 South-Western/Thomson Learning.
Capital Budgeting Overview
Saba Soliman al-Mohawis
Cost of Equity (Ke).
Final Review FIN3701.
Finance Review Byers.
Chapter 14 Cost of Capital
11 Chapter Cost of Capital.
Presentation transcript:

New Equity Issuance FCost of External Equity   Ex. Suppose Archer’s Aquarium Equipment may continue to issue unlimited amounts of common equity at a floatation cost of 8%. The firm recently paid a common stock dividend of $3 per share, and the firm’s dividends are expected to grow by 3% per annum. If the firm’s current stock price is $40 per share, what is the cost of external equity for Archer’s Aquarium Equipment?

Weighted Average Cost of Capital  Given an optimal capital structure of 60% common equity, 30% debt, and 10% preferred stock, what is Archer’s Aquarium Equipment’s weighted average cost of capital (WACC) for capital budgets in excess of $50 million?

Optimal Capital Budget FInvestment Opportunity Schedule (IOS) - FEx. Archer’s Aquarium Equipment can select among the following projects:

Optimal Capital Budget  Which projects should Archer’s Aquarium Equipment undertake? % New Capital Raised

Comprehensive Example FEx. Ling’s Libation Barn has 4 potential capital investment projects with the following costs and rates of return: FLLB estimates it can issue debt with a before-tax cost of 10 percent, and its marginal federal-plus-state tax rate is 30 percent. Ling’s Libation Barn may also issue preferred stock at $50 per share, which pays a constant dividend of $5 per year. The floatation cost on preferred stock issuance is $1 per share. FIn addition, net income is expected to be $250,000, and the firm plans to maintain its current dividend payout ratio of 40%. The firm’s stock is currently selling for $40 per share. The year-end dividend (D 1 ) is expected to be $3.50, and the dividend growth rate is expected to be constant at 6% per year into the foreseeable future. Floatation costs of issuing new common stock equal $4 per share (F=10%), and LLB’s optimal capital structure consists of 75% common equity, 15% debt, and 10% preferred stock.

Retained Earnings Break Point  What is LLB’s retained earnings break point?

Capital Component Costs  What is LLB’s component cost of debt?  What is LLB’s component cost of preferred stock?  What is LLB’s component cost of retained earnings?  What is LLB’s component cost of new common equity?

Weighted Average Cost of Capital  What is LLB’s weighted average cost of capital for capital budgets <$200,000?  What is LLB’s weighted average cost of capital for capital budgets > $200,000?

Optimal Capital Budget  What should be the size of LLB’s optimal capital budget?

Feedback: Privacy Policy Feedback
Do Not Sell My Personal Information
About project: SlidePlayer Terms of Service

© 2025 SlidePlayer.com. Inc. All rights reserved.