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11 Cards in this Set
- Front
- Back
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Steps for calculating the weighted average cost of capital
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1. Calculate the cost of each source of capital
2. Calcualte the weight of each source of capital 3. Calculate the weighted average cost of capital (WACC) |
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Formula for Cost of Loans
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KL = ( interest rate) (1- tax rate)
= after-tax cost of loan |
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The General Rule for Weighted Average Cost of Capital
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The cost to a company of the major sources of financing will equal the return to the investor
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two exceptions to:
The General Rule for Weighted Average Cost of Capital |
1) Company gets tax shield from some sources of financing
2) If a firm incurs additional costs from some sources of financing |
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Marginal cost of capital (MCC)
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the weighted cost of obtaining the next dollar of capital.
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A firm's desired capital structure
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Optimal Capital Structure
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How does equity formulas change with and without flotation costs
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KRE = KE (with out flotation costs)
KRE < KE KRE is less than KE (with flotation costs) |
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How does MCC change in relation to Preferred Stock?
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As more money is raised through preferred stock, the cost to a firm rises, causing MCC to rise as well.
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How does MCC change in relation to Debt?
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The MCC to a firm rises as the firm borrows more than certain amounts.
( the scarcity concept) |
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the amount of total financing at which a change occurs in the MCC
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Break point in the MCC schedule
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Steps for calculation Capital Budgeting analysis
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1) Determine how much money the firm is going to raise for new capital budgeting projects
2) Construct the firm's MCC schedule 3) Determine the firm's marginal cost of capital, at level of money that it will raise. 4) Use the firm's marginal cost of capital, at level of money, for the firm's NPV analysis |
