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MUHAMMADAQIBISHTIAQ
MUHAMMADOSAMAAQIL
MUHAMMADASADALI
S.M.ABBASALIRIZVI
COURSE NO.ACT-512(BASICFINANCE)
PRESENTED TO
Mr.IRSHADALI
CostofCapital
Where,
As an opportunity cost
Incorporates debt tax shields
Risk and return
WACC (EXAMPLE)
Suppose the Widget Company has a capital structure composed of the
following, in billions:
Capital Structure (%)
Debt
10
20 %
Common equity
40
80 %
If the before-tax cost of debt is 9%, the required rate of return on equity is
15%, and the marginal tax rate is 30%, what is Widgets weighted average cost
of capital?
Solution:
WACC
=
=
=
[(0.20)(0.09)(1 0.30)] + [(0.8)(0.15)]
0.0126 + 0.120
0.1325, or 13.25 %
Debt Rating
Cost of Preferred
Equity
Return on
Preferred Stock
Cost of Common
Equity
Capital Asset
Pricing Model
Dividend
Discount Model
Bond Yield Plus
Risk Premium
Cost of Debt
The after-tax cost of debt, ri as stated in the following
equation:
rd (1 T)
Debt-Rating Approach
Consider a company that has
nontraded $100 million of debt
outstanding that has a debt-rating
of AA. The yield on AA debt is
currently 6.2%. What is the aftertax cost of debt if the marginal
tax rate is 40%?
Solution:
ri = 0.05 (1 0.4) = 3.156%
Solution:
ri = 0.062 (1 0.4) = 3.72%
Company Performance
Call Provision
Where,
=+
=4.75%+1.2(6%)
=11.95%.
Bond # 1
Bond # 2
20
20
Yearstocall
Couponrate
6.00%
8.50%
$926.29
$1,121.00
Maturityvalue
$1000
$1000
YTM
6.67%
7.34%
YTC
9.85%
6.67%
MostlikelyYield
6.67%
6.67%
Yearstomaturity
Price
= 6.67% + 3.00%
= 9.67%.
The range of estimates is
between 8.67% and 10.67%.
Net Income
Stockholders' Equity
Thank you
Q/A