Chapter 11
Cost of Capital
Cost of Debt
• Kd= Interest * (1-Tax Rate)
• Kd= 10/100*(1-40/100)
• Kd= .1*(1-0.4)= .1*0.6= .06 = .06*100= 6%
Cost of Preferred Stock
•Kp = Dp/(Pp-F)
•Kp= 10/(100-2.5)
•Kp= 10/97.5 = .1026 =10.26%
Cost of Common Equity
•Ke = D1/Po+g
•Ke= 4/50+.05
•Ke=.08+.05 =.13= 13%
Cost of New Common Stock
•Kn= (D1/Po-F)+g
•Kn= (4/50-2.5)+.05
•Kn= .084+.05=.134*100= 13.4%
WACC
• After Tax Cost of Debt = Before Tax Cost of Debt
*(1-Tax Rate)
• After Tax Cost of Debt,KdT = 10/100*(1-40/100)
• KdT= 0.06*100= 6%
WACC
•WACC = Wd*KdT + Wps*Kps+ Ws*Ks
•WACC= .40*.06+.15*.105+.45*.13
•WACC= .024+.01575+.0585
•WACC= .09825*100= 9.825%
19
•Wd=35% =0.35
•Wp=15%= 0.15
•We=50%= 0.50
•After Tax- Cost of debt ,Kd=
6.5%=.065
•Cost of Preferred Stock, Kp= 10% =
0.10
•Cost of Common Equity, Ke=
13.5%=0.135
• Weighted Cost of Debt = Wd* Kd = 0.35*0.065 =
0.02275
• Weighted Cost of Preferred Stock= Wp* Kp=
0.15*0.10= 0.015
• Weighted Cost of Equity = We* Ke = 0.50* .135 =
0.0675
• WACC= .02275+ .015+.0675 = 0.10525*100=10.525%
22
•After Tax Cost of Debt , Kd= Yield *
(1-T)
•= .09* (1-.35)= .09*.65 = .0585
•Wd= 35% = 0.35
•Weighed Cost of Debt = Wd*kd
•=.35*.0585= 0.020475=2.0475%
•Wp= 20%= 0.20
•Pp=D/(Kp-F)
•Kp-F=D/Pp
•Kp=(D/Pp)+F
•Kp=(12/106)+4.5= 4.61%=.0461
•Weighted Cost of Preferred Stock =
0.20*0.0461= .00923
• We= 45% =0.45
• Cost of Common Equity ,Kn= ?
• Pe= D/ke-g
• Ke=(D/Pe)+g
Ke= (5/60)+.06= .143
• Weighted Cost of Common Equity = We*Ke
• = 0.45* .143 = 0.0645
• WACC = .020475+.00923+.00645 =0.094205=9.4205%
24
•Cost of Debt , Kd = Yield*(1-T)
•Kd= .134*(1-.35)= .0871
•Weight of Debt, Wd=40%=.40
•Weighted Cost of Debt = Wd*kd
•= .40* .0871 = 0.03484
• Weight of Preferred Stock , Wp= 25%=0.25
• Cost of Preferred Stock, Kp =?
• Pp= D/(Kp-F)
• Kp-F = D/Pp
• Kp=(D/Pp)+F
• Kp= 6.75/54+ (54*2.1/100)
• Kp= .125+ 1.134= 1.259%=.01259
• Weighted Cost of Preferred Stock=
Wp*Kp=0.25*.01259=.0031475
Weight of Common Equity,We= 35% =0.35
Cost of Common Equity,Ke=?
Pe=D/(Ke-g)
Ke-g= D/Pe
Ke= (D/Pe)+g
Ke= ( 5.3/58)+.07
Ke= 0.1614
Weighted Cost of Equity = We*Ke= .35* .1614= .0564
•WACC=
0.03484+.0031475+.0564
•= 0.0944= 9.44%