Weighted average cost is the average of the costs of specific sources of capital employed in a business, properly weighted by the proportion they hold in the firm’s capital structure.
Book Value :
Value shown in the balance sheet is called book value. Weightage to each source of finance is given on the basis of book value as recorded in the balance sheet.
Market Value :
Market value represent prices of prevailing in the stock market for securities. So current market price are applied in ascertaining the weightage.
Weighted average cost is the average of the costs of specific sources of capital employed in a business, properly weighted by the proportion they hold in the firm’s capital structure.
Book Value :
Value shown in the balance sheet is called book value. Weightage to each source of finance is given on the basis of book value as recorded in the balance sheet.
Market Value :
Market value represent prices of prevailing in the stock market for securities. So current market price are applied in ascertaining the weightage.
Cost of Capital,Meaning,Computation of Specific Costs,Cost of Debt,Cost of Preference Shares,Cost of Equity Capital,Cost of Retained Earnings ,Weighted Average Cost of Capital
The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project.
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
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Powerpoint Training - Ten golden rules for making effective PresentationsSiddhartha Roy
Mr. Siddhartha Roy takes you through the Dos and Donts of preparing Presentations. If his 10 golden rules are followed your presentation will be effective, readable and of minimal file size.
Cost of Capital,Meaning,Computation of Specific Costs,Cost of Debt,Cost of Preference Shares,Cost of Equity Capital,Cost of Retained Earnings ,Weighted Average Cost of Capital
The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project.
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
Powerpoint Training - Ten golden rules for making effective PresentationsSiddhartha Roy
Mr. Siddhartha Roy takes you through the Dos and Donts of preparing Presentations. If his 10 golden rules are followed your presentation will be effective, readable and of minimal file size.
Measures of cost of capital
The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment.
The cost of capital represents the overall cost of financing to the firm.
This presentation is an overview Cost of Capital.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
9. The Weighted Average Calculation—Example Q: Calculate the WACC for the Zodiac Company given the following information about its capital structure. A: First we need to calculate the capital structure weights based on the value given. For debt this weight is $60,000 $200,000 = 30%. Next, each component’s cost is multiplied by its weight and the results are summed as shown below: Example $200,000 14 90,000 Common stock 11 50,000 Preferred Stock 9% $60,000 Debt Cost Value Capital Component WACC = 14 11 9% Cost 100% 45% 25% 30% Weight 11.75% $200,000 6.30% 90,000 Common stock 2.75% 50,000 Preferred Stock 2.70% $60,000 Debt Value Capital Component
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12. Developing Market-Value-Based Capital Structure—Example Q: The Wachusett Corporation has the following capital situation. Debt: Two thousand bonds were issued five years ago at a coupon rate of 12%. They had 30-year terms and $1,000 face values. They are now selling to yield 10%. Preferred stock: Four thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 13%. Equity: Wachusett has 200,000 shares of common stock outstanding, currently selling at $15 per share. Develop Wachusett's market-value-based capital structure. Example
13. Developing Market-Value-Based Capital Structure—Example A: To determine the market value of each source of capital, the market value (total) of each source must be calculated and then its percentage determined. The price of Wachusett's bonds in the market must be determined. We know the bonds have 25 years remaining until maturity, pay interest of $120 annually ($60 semi-annually) and are yielding 10% annually (5% semi-annually). Thus, each bond is selling for $1,182.55 in the market, calculated as shown below. Because there are 2,000 bonds outstanding, the market value of the firm's debt is $2,365,100, or $1,182.55 x 2,000. Example P b = PMT[PVFA k,n ] + FV[PVF k,n ] = $60[PVFA 5,50 ] + $1,000[PVF 5,50 ] = $60(18.2559) + $1,000(0.0872) = $1,182.55
14. Developing Market-Value-Based Capital Structure—Example The firm's preferred stock represents a perpetuity that pays $7.50 annually and is yielding 13%. Thus, the value of each share of preferred stock is $57.69, or $7.50 .13. Because there are 4,000 shares outstanding, the total market value of Wachusett's preferred stock is $230,760, or $57.69 x 4,000. Each share of Wachusett's common stock is trading for $15, thus the total market value of the firm's equity is $3,000,000, or $15 x 200,000 shares. Next, we calculate the portion of the the firm's total capital that each source represents: Example 100.0% $5,595,860 53.6 3,000,000 Equity 4.1 230,760 Preferred 42.3% $2,365,100 Debt
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19. The Cost of Preferred Stock—Example Q: The preferred stock of the Francis Corporation was issued several years ago with each share paying 6% of a $100 par value. Flotation costs on new preferred are expected to average 11% of the funds raised. (a) What is Francis's cost of preferred capital if the interest rate on similar preferred stock is 9% today? (b) Calculate Francis's cost of preferred stock if the stock is selling at $75 per share today. A: Questions (a) and (b) are both asking the same question; however with (a) we have the market return provided and with (b) we are given the information needed to calculate the market return. (a) Using the formula k p (1 - f) we simply adjust the market return by flotation costs: 9% (1 - .11) = 10.1%. (b) Using the formula D p (1 - f) P p we calculate the cost using the dividend and current price of preferred stock: (6% × $100) (1-.11)$75 = 9%. Example
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29. Figure 12.2: MCC Schedule and IOS Projects A, B and C should be undertaken because their expected returns exceed the expected costs.
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