1. MD. FARHADUL ISLAM ID : 16-066 WELCOME TO THE PRESENTATION

2. Cost of Capital

3.  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

4. 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

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

6. 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%

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

8. 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

9. 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

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

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