Corporate finance
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1) The document discusses the cost of retained earnings and cost of common stock. It defines retained earnings as the portion of earnings left after paying dividends that is available for reinvestment. 2) For determining the cost of retained earnings, the document provides formulas both with and without flotation costs. It notes that the cost of retained earnings is typically considered equal to the cost of equity. 3) The cost of new common stock, also called the cost of external equity, is the cost of retained earnings increased by flotation costs associated with issuing new shares. An example calculation is provided.
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Cost of capital
The document discusses the cost of capital, which is the cost of raising funds needed to operate a firm. It provides formulas to calculate the cost of different sources of capital, including debt, preference shares, equity shares, and retained earnings. It also explains how to calculate the weighted average cost of capital, which is the composite cost of capital from different financing sources, using both book value and market value weighted methods.
Cost of capital
The cost of capital is the expected return required by providers of capital, such as shareholders and lenders. It is important for evaluating investment options and making finance decisions by comparing the cost of different capital sources. There are various approaches to calculating the cost of different capital components like debt, preference shares, equity and retained earnings. The weighted average cost of capital combines the costs of all capital sources based on their relative proportions in the company's capital structure.
Cost of capital
The document discusses the concept of cost of capital. It defines cost of capital as the minimum rate of return a firm must earn on its investments to maintain the market value of its equity shares. It notes that cost of capital includes the return on risk-free investments plus premiums for business risk and financial risk. The document also outlines different types of costs of capital such as explicit vs implicit cost and average vs marginal cost. Finally, it provides examples of calculating the costs of different sources of capital such as debt, preference shares, and equity.
Cost of capital
The document discusses the concept of cost of capital. It defines cost of capital as the minimum required rate of return on funds committed to a project or firm based on the riskiness of cash flows. It then covers the basic aspects of cost of capital including it representing a rate of return rather than an actual cost, and comprising a risk-free rate, business risk premium, and financial risk premium. The document also discusses approaches to calculating the cost of different sources of capital like equity, debt, and retained earnings, as well as weighted average cost of capital and marginal cost of capital.
Cost of capital ppt @ bec doms on finance
The document discusses the cost of capital and how it is calculated. It can be summarized as:
1) The cost of capital is a weighted average of the costs of a firm's capital components (debt, preferred stock, common equity), weighted by the proportion of each in the firm's target capital structure.
2) The cost of each capital component is calculated based on its market yield after adjusting for taxes (for debt) and flotation costs.
3) The weighted average cost of capital (WACC) provides a benchmark to evaluate whether potential projects should be undertaken based on whether their returns exceed the WACC.
Measures of Cost of Capital
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.
Cost of Capital Theory
This document discusses the cost of capital and its components. It defines cost of capital as the minimum rate of return a firm must earn on its investments to maintain its market value and earnings per share. There are three components to cost of capital: the zero risk return, premium for business risk, and premium for financial risk. Cost of capital can be calculated using an equation that adds these three components. The document also discusses different types of cost of capital such as marginal vs average cost, explicit vs implicit cost, future vs historical cost, specific vs combined cost, and spot vs normal cost. Methods for calculating cost of capital include computing the specific cost of each source of funds and the composite or weighted average cost of capital.
The Cost of Capital
This document discusses the importance of correctly calculating a firm's cost of capital and the various components that make up its cost of capital. It explains that a firm uses its cost of capital to determine if investments are profitable. If the cost of capital is miscalculated, the firm could invest in too many unprofitable projects or not enough profitable ones.
The document then outlines the various sources of long-term capital firms use, including long-term debt, preferred stock, and common equity. It discusses methods for calculating the costs of each component, such as using current market yields or the CAPM model. The weighted average cost of capital (WACC) is calculated using the costs of each component weighted by the firm's target
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Cost of capital
The document discusses the cost of capital, which is the cost of raising funds needed to operate a firm. It provides formulas to calculate the cost of different sources of capital, including debt, preference shares, equity shares, and retained earnings. It also explains how to calculate the weighted average cost of capital, which is the composite cost of capital from different financing sources, using both book value and market value weighted methods.
Cost of capital
The cost of capital is the expected return required by providers of capital, such as shareholders and lenders. It is important for evaluating investment options and making finance decisions by comparing the cost of different capital sources. There are various approaches to calculating the cost of different capital components like debt, preference shares, equity and retained earnings. The weighted average cost of capital combines the costs of all capital sources based on their relative proportions in the company's capital structure.
Cost of capital
The document discusses the concept of cost of capital. It defines cost of capital as the minimum rate of return a firm must earn on its investments to maintain the market value of its equity shares. It notes that cost of capital includes the return on risk-free investments plus premiums for business risk and financial risk. The document also outlines different types of costs of capital such as explicit vs implicit cost and average vs marginal cost. Finally, it provides examples of calculating the costs of different sources of capital such as debt, preference shares, and equity.
Cost of capital
The document discusses the concept of cost of capital. It defines cost of capital as the minimum required rate of return on funds committed to a project or firm based on the riskiness of cash flows. It then covers the basic aspects of cost of capital including it representing a rate of return rather than an actual cost, and comprising a risk-free rate, business risk premium, and financial risk premium. The document also discusses approaches to calculating the cost of different sources of capital like equity, debt, and retained earnings, as well as weighted average cost of capital and marginal cost of capital.
Cost of capital ppt @ bec doms on finance
The document discusses the cost of capital and how it is calculated. It can be summarized as:
1) The cost of capital is a weighted average of the costs of a firm's capital components (debt, preferred stock, common equity), weighted by the proportion of each in the firm's target capital structure.
2) The cost of each capital component is calculated based on its market yield after adjusting for taxes (for debt) and flotation costs.
3) The weighted average cost of capital (WACC) provides a benchmark to evaluate whether potential projects should be undertaken based on whether their returns exceed the WACC.
Measures of Cost of Capital
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.
Cost of Capital Theory
This document discusses the cost of capital and its components. It defines cost of capital as the minimum rate of return a firm must earn on its investments to maintain its market value and earnings per share. There are three components to cost of capital: the zero risk return, premium for business risk, and premium for financial risk. Cost of capital can be calculated using an equation that adds these three components. The document also discusses different types of cost of capital such as marginal vs average cost, explicit vs implicit cost, future vs historical cost, specific vs combined cost, and spot vs normal cost. Methods for calculating cost of capital include computing the specific cost of each source of funds and the composite or weighted average cost of capital.
The Cost of Capital
This document discusses the importance of correctly calculating a firm's cost of capital and the various components that make up its cost of capital. It explains that a firm uses its cost of capital to determine if investments are profitable. If the cost of capital is miscalculated, the firm could invest in too many unprofitable projects or not enough profitable ones.
The document then outlines the various sources of long-term capital firms use, including long-term debt, preferred stock, and common equity. It discusses methods for calculating the costs of each component, such as using current market yields or the CAPM model. The weighted average cost of capital (WACC) is calculated using the costs of each component weighted by the firm's target
Cost of Capital
This document discusses various aspects of capital budgeting and project financing, including:
1) Types of equity financing like retained earnings and issuing new stock or bonds.
2) Methods of debt financing such as bonds and term loans.
3) How to calculate the weighted average cost of capital (WACC) using the costs of equity and debt.
4) Examples are provided to demonstrate calculating the costs of different sources of financing like equity, debt, and the overall WACC.
Cost of Capital Learning
The document discusses capital budgeting methods for evaluating investment projects, including payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). It provides an example calculation of the payback period for Project A using a table of cash flows for Projects A and B over 4 time periods. The payback period for Project A is calculated to be 2.9 years.
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After completing this module, students should be able to: identify important cost of capital characteristics; compute cost of capital using different capital sources; apply cost of capital concepts; and calculate weighted cost of capital. Cost of capital is the rate of return needed to attract investors and is used to evaluate capital budgeting projects and set target capital structures. It is computed separately for different capital sources like debt, preferred stock, common stock, and retained earnings, then weighted together based on the firm's target capital structure.
Financial Management; Chapter: cost of capital
This document discusses the cost of capital, including the costs of equity, debt, and preferred stock. It provides formulas to calculate each of these costs. For example, the cost of debt (rd) is calculated as the interest rate (1 - tax rate). The weighted average cost of capital (WACC) combines the costs and weights of each component of the capital structure. An example is provided to demonstrate calculating WACC given specific financial information for a company.
Cost of capital
The document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm requires to increase its market value. It then discusses:
1) The sources of capital for a firm including debt, equity, preference shares, and retained earnings.
2) How to calculate the weighted average cost of capital (WACC) by determining the costs of each source and weighting them based on proportion of total capital.
3) Methods to calculate the costs of different sources like debt, preference shares, equity, and retained earnings. This includes considering factors like tax rates, issue premiums/discounts, and growth rates.
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1) The CFO provided information on the firm's capital structure, bond yields, stock prices, tax rates, and growth expectations to estimate the WACC.
2) The costs of debt, preferred stock, and retained earnings were calculated using the bond yield, dividend yield, CAPM, and DCF approaches.
3) The WACC was estimated to be 7.58% using a 40% weight on debt at 3.6%, 10% weight on preferred stock at 7.4%, and 50% weight on retained earnings at 10.08%.
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This document discusses the cost of capital and how firms calculate it. It defines the cost of capital as the rate of return a firm must earn on investments to maintain its stock price. A firm needs to calculate its weighted average cost of capital (WACC) to properly evaluate investment opportunities. The WACC takes into account the different costs of a firm's sources of capital, such as debt and equity, weighted by their proportions in the firm's target capital structure. The document outlines how to calculate the costs of different sources of capital and how to determine the WACC.
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This document defines cost of capital and discusses its significance. It outlines the different types of capital that make up a firm's cost of capital, including debt, preference shares, equity shares, and retained earnings. It provides formulas for calculating the cost of each type of capital. The weighted average cost of capital (WACC) is introduced as a weighted average of the different capital costs that provides the overall cost of capital for a firm.
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The document defines the cost of capital and outlines methods for computing the cost of various sources of capital, including debt, preference shares, equity, and a weighted average cost of capital (WACC). Specifically, it provides formulas to calculate the cost of debt depending on whether the debt is issued at par and redeemable or not. It also gives approaches for calculating the cost of preference shares, equity using the dividend yield, dividend growth, and capital asset pricing models, and defines WACC as a weighted average of the cost of each source of funds based on their proportion of total capital.
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This document discusses different types of costs of capital. It defines cost of capital as the minimum rate of return required on investments. The three main types of capital discussed are equity, debt, and preference shares. Cost of debt is the rate expected by lenders and is calculated as interest payments over initial debt amount. Cost of equity represents the compensation demanded by shareholders and can be calculated as dividend payments over share price. Cost of preference shares is the fixed rate payable to preference shareholders and is calculated based on dividend payments and redemption amounts. The document also briefly mentions comparing equity to debt and preference shares.
Cost of capital....ppt
The document discusses the concept of cost of capital, which is the minimum rate of return required for an investment to be worthwhile. It notes there are explicit costs associated with raising funds as well as implicit opportunity costs. The cost of capital includes costs of both debt and equity weighted by their proportions in the company's capital structure. While book values can be used, market values are preferred for determining these weights as they reflect current valuations.
Cost of equity
This document discusses methods for calculating the cost of equity for a company. It defines cost of equity as the minimum return required to attract investors to invest in a company's common stock. Two main models are described: the capital asset pricing model (CAPM) and dividend discount model. Under CAPM, cost of equity equals the risk-free rate plus the stock's beta coefficient multiplied by the market risk premium. Under the dividend discount model, cost of equity equals dividends in the next period divided by the current stock price plus the growth rate. Examples are provided to demonstrate calculating cost of equity for Caterpillar Inc. under both models.
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This document discusses the concept of cost of capital and how to calculate it. It explains that the cost of capital is the minimum required rate of return for a project or firm given the risks. It then outlines different methods for calculating the cost of capital, including the weighted average cost of capital (WACC) and capital asset pricing model (CAPM). The document also discusses using market values versus book values for weights and calculating divisional or project specific costs of capital.
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This document discusses the Capital Asset Pricing Model (CAPM) and how it is used to calculate the cost of equity. It defines key terms used in CAPM such as beta, risk-free rate of return, risk premium, required rate of return, and market return. It also provides examples of applying the CAPM formula to calculate the cost of equity for four Indian companies using their respective betas, the risk-free rate, and average market return.
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- Leverage provides the framework for financing decisions and can be defined as using an asset or source of funds that requires paying a fixed cost or return.
- Operating leverage is associated with fixed operating costs and how much they magnify changes in sales on operating profits. Financial leverage measures how debt impacts changes in earnings per share.
- Degree of operating leverage (DOL) and degree of financial leverage (DFL) are used to measure the sensitivity of profits and earnings to changes in sales and operating profits respectively. Higher leverage means greater risk but also greater potential returns.
Cost Of Capital
Cost of capital is the minimum rate of return that a firm must earn on its investments to maintain its market value. It includes the explicit costs like interest on debt and the implicit opportunity costs of foregoing alternative investments. The cost of capital is calculated separately for different sources of capital like debt, preference shares, equity, and retained earnings using various models and weighted averaged to obtain the overall cost based on the firm's capital structure.
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The document discusses capital structure and cost of capital. It explains that changing a company's gearing (debt to equity ratio) can impact its weighted average cost of capital (WACC) and shareholder wealth. The traditional theory is that WACC has a U-shaped relationship with gearing, with the optimal point at the bottom of the U. Modigliani-Miller theory suggests that with no taxes, gearing is irrelevant as debt and equity costs offset, but with taxes, higher gearing lowers WACC. Betas measure risk, with asset beta measuring business risk and equity beta measuring both business and financial risk from debt. An appropriate cost of capital can be calculated by degearing and regearing
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The document discusses cost of capital and its importance for investment decision making. It defines cost of capital as the rate of return a company must pay to its investors for raising funds through different sources like debt and equity. It also discusses weighted average cost of capital (WACC) as the blended rate a firm pays for its capital, incorporating costs of different sources based on their market values. The document emphasizes that cost of capital should be used to evaluate potential investments and set the minimum return threshold. It also summarizes investment theory and how cost of capital analysis helps rational investment decision making per Miller and Modigliani's theory.
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The document discusses the concept of cost of capital and how it is calculated for different sources of funds including debt, equity, preference shares, and retained earnings. It provides formulas to calculate the post-tax cost of various types of debt instruments, preference shares, and equity. The document also discusses different approaches like dividend yield, CAPM, and earnings yield to estimate the cost of equity and the importance of capital structure decisions in maximizing shareholder value.
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This document discusses various aspects of capital budgeting and project financing, including:
1) Types of equity financing like retained earnings and issuing new stock or bonds.
2) Methods of debt financing such as bonds and term loans.
3) How to calculate the weighted average cost of capital (WACC) using the costs of equity and debt.
4) Examples are provided to demonstrate calculating the costs of different sources of financing like equity, debt, and the overall WACC.
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The document discusses capital budgeting methods for evaluating investment projects, including payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). It provides an example calculation of the payback period for Project A using a table of cash flows for Projects A and B over 4 time periods. The payback period for Project A is calculated to be 2.9 years.
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After completing this module, students should be able to: identify important cost of capital characteristics; compute cost of capital using different capital sources; apply cost of capital concepts; and calculate weighted cost of capital. Cost of capital is the rate of return needed to attract investors and is used to evaluate capital budgeting projects and set target capital structures. It is computed separately for different capital sources like debt, preferred stock, common stock, and retained earnings, then weighted together based on the firm's target capital structure.
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This document discusses the cost of capital, including the costs of equity, debt, and preferred stock. It provides formulas to calculate each of these costs. For example, the cost of debt (rd) is calculated as the interest rate (1 - tax rate). The weighted average cost of capital (WACC) combines the costs and weights of each component of the capital structure. An example is provided to demonstrate calculating WACC given specific financial information for a company.
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The document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm requires to increase its market value. It then discusses:
1) The sources of capital for a firm including debt, equity, preference shares, and retained earnings.
2) How to calculate the weighted average cost of capital (WACC) by determining the costs of each source and weighting them based on proportion of total capital.
3) Methods to calculate the costs of different sources like debt, preference shares, equity, and retained earnings. This includes considering factors like tax rates, issue premiums/discounts, and growth rates.
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1) The CFO provided information on the firm's capital structure, bond yields, stock prices, tax rates, and growth expectations to estimate the WACC.
2) The costs of debt, preferred stock, and retained earnings were calculated using the bond yield, dividend yield, CAPM, and DCF approaches.
3) The WACC was estimated to be 7.58% using a 40% weight on debt at 3.6%, 10% weight on preferred stock at 7.4%, and 50% weight on retained earnings at 10.08%.
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This document discusses the cost of capital and how firms calculate it. It defines the cost of capital as the rate of return a firm must earn on investments to maintain its stock price. A firm needs to calculate its weighted average cost of capital (WACC) to properly evaluate investment opportunities. The WACC takes into account the different costs of a firm's sources of capital, such as debt and equity, weighted by their proportions in the firm's target capital structure. The document outlines how to calculate the costs of different sources of capital and how to determine the WACC.
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This document defines cost of capital and discusses its significance. It outlines the different types of capital that make up a firm's cost of capital, including debt, preference shares, equity shares, and retained earnings. It provides formulas for calculating the cost of each type of capital. The weighted average cost of capital (WACC) is introduced as a weighted average of the different capital costs that provides the overall cost of capital for a firm.
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The document defines the cost of capital and outlines methods for computing the cost of various sources of capital, including debt, preference shares, equity, and a weighted average cost of capital (WACC). Specifically, it provides formulas to calculate the cost of debt depending on whether the debt is issued at par and redeemable or not. It also gives approaches for calculating the cost of preference shares, equity using the dividend yield, dividend growth, and capital asset pricing models, and defines WACC as a weighted average of the cost of each source of funds based on their proportion of total capital.
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This document discusses different types of costs of capital. It defines cost of capital as the minimum rate of return required on investments. The three main types of capital discussed are equity, debt, and preference shares. Cost of debt is the rate expected by lenders and is calculated as interest payments over initial debt amount. Cost of equity represents the compensation demanded by shareholders and can be calculated as dividend payments over share price. Cost of preference shares is the fixed rate payable to preference shareholders and is calculated based on dividend payments and redemption amounts. The document also briefly mentions comparing equity to debt and preference shares.
Cost of capital....ppt
The document discusses the concept of cost of capital, which is the minimum rate of return required for an investment to be worthwhile. It notes there are explicit costs associated with raising funds as well as implicit opportunity costs. The cost of capital includes costs of both debt and equity weighted by their proportions in the company's capital structure. While book values can be used, market values are preferred for determining these weights as they reflect current valuations.
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This document discusses methods for calculating the cost of equity for a company. It defines cost of equity as the minimum return required to attract investors to invest in a company's common stock. Two main models are described: the capital asset pricing model (CAPM) and dividend discount model. Under CAPM, cost of equity equals the risk-free rate plus the stock's beta coefficient multiplied by the market risk premium. Under the dividend discount model, cost of equity equals dividends in the next period divided by the current stock price plus the growth rate. Examples are provided to demonstrate calculating cost of equity for Caterpillar Inc. under both models.
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This document discusses the concept of cost of capital and how to calculate it. It explains that the cost of capital is the minimum required rate of return for a project or firm given the risks. It then outlines different methods for calculating the cost of capital, including the weighted average cost of capital (WACC) and capital asset pricing model (CAPM). The document also discusses using market values versus book values for weights and calculating divisional or project specific costs of capital.
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This document discusses the Capital Asset Pricing Model (CAPM) and how it is used to calculate the cost of equity. It defines key terms used in CAPM such as beta, risk-free rate of return, risk premium, required rate of return, and market return. It also provides examples of applying the CAPM formula to calculate the cost of equity for four Indian companies using their respective betas, the risk-free rate, and average market return.
Leverage
- Leverage provides the framework for financing decisions and can be defined as using an asset or source of funds that requires paying a fixed cost or return.
- Operating leverage is associated with fixed operating costs and how much they magnify changes in sales on operating profits. Financial leverage measures how debt impacts changes in earnings per share.
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Cost of capital is the minimum rate of return that a firm must earn on its investments to maintain its market value. It includes the explicit costs like interest on debt and the implicit opportunity costs of foregoing alternative investments. The cost of capital is calculated separately for different sources of capital like debt, preference shares, equity, and retained earnings using various models and weighted averaged to obtain the overall cost based on the firm's capital structure.
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The document discusses capital structure and cost of capital. It explains that changing a company's gearing (debt to equity ratio) can impact its weighted average cost of capital (WACC) and shareholder wealth. The traditional theory is that WACC has a U-shaped relationship with gearing, with the optimal point at the bottom of the U. Modigliani-Miller theory suggests that with no taxes, gearing is irrelevant as debt and equity costs offset, but with taxes, higher gearing lowers WACC. Betas measure risk, with asset beta measuring business risk and equity beta measuring both business and financial risk from debt. An appropriate cost of capital can be calculated by degearing and regearing
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The document discusses cost of capital and its importance for investment decision making. It defines cost of capital as the rate of return a company must pay to its investors for raising funds through different sources like debt and equity. It also discusses weighted average cost of capital (WACC) as the blended rate a firm pays for its capital, incorporating costs of different sources based on their market values. The document emphasizes that cost of capital should be used to evaluate potential investments and set the minimum return threshold. It also summarizes investment theory and how cost of capital analysis helps rational investment decision making per Miller and Modigliani's theory.
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The document discusses the concept of cost of capital and how it is calculated for different sources of funds including debt, equity, preference shares, and retained earnings. It provides formulas to calculate the post-tax cost of various types of debt instruments, preference shares, and equity. The document also discusses different approaches like dividend yield, CAPM, and earnings yield to estimate the cost of equity and the importance of capital structure decisions in maximizing shareholder value.
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1. This document provides an overview of time value of money concepts including future value, present value, compounding, discounting, and annuities. It also covers uneven cash flows, perpetuities, effective annual rate, profitability index, and internal rate of return.
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Corporate finance
- 1. Presented BY: Faiz Subhani Roll num 43 MBA 3.5 3rd morning
- 2. Corporate finance Topics: Cost of retained earning Cost of common stock
- 3. Cost Of Retained Earning Concept Remaining portion of earning after paying dividend It is an internal source of long-term financing In other words amount available for reinvestment
- 4. Concept Generally, retained earning is considered as cost free source of financing But It is not a cost free source of The cost of retained earning must be at least equal to shareholders rate of return on re- investment.
- 5. Determination Of Cost Of Retained Earning Note: In the absence of any information relating to addition of cost of re-investment and extra burden of personal tax, the cost of retained earning is considered to be equal to the cost of equity. cost of retained earnings differs from the cost of equity when 1. there is flotation cost to be paid on re-investment 2. personal tax rate of shareholders exists
- 6. Determination Of Cost Of Retained Earning When there is no flotation Formula Cost of retained earning= 𝐷1 𝑁𝑃 𝑔 Here, D1= expected dividend per share NP= net proceeds G= growth
- 7. Determination Of Cost Of Retained Earning When there is flotation cost Formula Cost of retained earning= 𝐾𝑒 1 − fp 1 − tp Here, fp = flotation cost on re-investment by shareholders tp = Shareholders' personal tax rate.
- 8. Cost of new common stock Concept It is also called cost of external equity it is based on the cost of retained earnings increased for flotation costs
- 9. Determination of cost of common stock For a constant-growth company Formula Cost of external equity=kc= 𝐷1 𝑃0 1−𝐹 + 𝑔 here, F= 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑓𝑙𝑜𝑡𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑠𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒
- 10. Example: cost of newly issued stock As in our previous example for Newco, assume the company's stock is selling for $40, its expected ROE is 10%, next year's dividend is $2 and the company expects to pay out 30% of its earnings. Additionally, assume the company has a flotation cost of 5%. What is Newco's cost of new equity when growth rate is 7%. Answer: kc = 2/40(1-.05)+ 0.07 = 0.123, or 12.3%