The marginal cost of capital is the cost of financing the next dollar of capital raised. It is calculated using the weighted average cost of capital formula, taking into account the cost of new equity needed. As a company continues raising capital and depletes retained earnings, it may need to issue new equity, causing its weighted average cost of capital to increase. This point where the cost increases is called the "breakpoint." The document provides an example calculation of a company's marginal cost of capital and breakpoint.
risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
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Approaches to determine appropriate capital structure - EBIT-EPS Approch
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What is the 'Time Value of Money - TVM'
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
- Understand the motives for corporate restructuring, different types of restructuring including: mergers & acquisitions, leveraged buyouts, and divestitures.
- Valuing the corporate restructuring process.
- Case Study: Exxon-Mobil merger
Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Thank You For Waching
Subscribe to DevTech Finance
Approaches to determine appropriate capital structure - EBIT-EPS Approch
anybody can join my google class (financial Mangement)
by entering class code : avkkvj5
What is the 'Time Value of Money - TVM'
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
- Understand the motives for corporate restructuring, different types of restructuring including: mergers & acquisitions, leveraged buyouts, and divestitures.
- Valuing the corporate restructuring process.
- Case Study: Exxon-Mobil merger
Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
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All related information about Cost of capital and investment theory for instance, weighted average cost of capital (WACC), cost of debt, cost of equity, investment theories and so on.
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Leading companies such as Nike, Toyota, and Siemens are prioritizing sustainable innovation in their business models, setting an example for others to follow. In this Sustainability training presentation, you will learn key concepts, principles, and practices of sustainability applicable across industries. This training aims to create awareness and educate employees, senior executives, consultants, and other key stakeholders, including investors, policymakers, and supply chain partners, on the importance and implementation of sustainability.
LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
3. Identify and define best practices and critical success factors essential for achieving sustainability goals within organizations.
CONTENTS
1. Introduction and Key Concepts of Sustainability
2. Principles and Practices of Sustainability
3. Measures and Reporting in Sustainability
4. Sustainability Implementation & Best Practices
To download the complete presentation, visit: https://www.oeconsulting.com.sg/training-presentations
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2. Marginal cost of capital
Definition
The WACC applicable to the next dollar of the total new financing.
Capital is any money used to finance a business and/or its
operations.
Capital can be acquired from many different sources: traditional
debt or equity financing or owner financing, grants, gains on
investment capital, retained earnings, accrual financing contracts
and forward payment agreements on capital.
The WMCC and cost of capital change over time.
3. Example:
Once retained earnings are depleted, Newco decides
to access the capital markets to raise new equity.
Newco, assume the company's stock is selling for
$40, its expected ROE is 10%, next year's dividend
is $2.00 and the company expects to pay out 30% of
its earnings. Additionally, assume the company has
a flotation cost of 5%. Newco's cost of new equity
(kc) is thus 12.3%, as calculated below:
kc = 2 + 0.07 = 0.123, or 12.3%
40(1-0.05)
Marginal Cost of Capital
4. Answer:
Using this new cost of equity, we can determine
the WACC as follows:
WACC = (wd)(kd)(1-t) + (wps)(kps) + (wce)(kce)
WACC = (0.4)(0.07)(1-0.4) + (0.05)(0.021) +
(0.55)(0.123)
WACC = 0.086, or 8.6%
The WACC has been stepped up from 8.4% to
8.6% given Newco's need to raise new equity.
Marginal Cost of Capital
5. Look Out!
At some point, as the company continues to raise capital,
the MCC can be higher than the WACC.
Marginal Cost of Capital
6. MCC Vs. WACC
The marginal cost of capital is simply the weighted
average cost of the last dollar of capital raised. As
mentioned previously, in making capital decisions,
a company keeps with a target capital structure.
There comes a point, however, when retained
earnings have been depleted and new common
stock has to be used. When this occurs, the
company's cost of capital increases.
This is known as the "breakpoint" and can be
calculated as follows:
7. Breakpoint for retained earnings =
retained earnings
wce
Example:
For Newco, assume we expect it to earn $50 million next year.
As mentioned in our previous examples, Newco's payout ratio
is 30%. What is Newco's breakpoint on the marginal cost
curve, if we assume wce = 55%?
MCC Vs. WACC
8. Answer:
Newco's breakpoint = $50 million (1-0.3) = $63.6
million
0.55
Thus, after Newco raises roughly $64 million of
total capital, new common equity will need to be
issued and Newco's WACC will increase to 8.6%.
Factors that affect the cost of capital can be
categorized as those that are controlled by the
company and those that are not.
MCC Vs. WACC