8.1 Cost of Capital Components
8.1a Cost of Debt
Cost of capital
Cost of debt
The after-tax cost of debt (kd ) depends on the interest rate (i ), and the tax
What are some of the advantages of a company using debt to fund their activities?
A 10% cost of debt with a 20% tax rate would result in an after-tax cost of capital of %.
In addition to the tax rate, the cost of debt for a company is also influenced by these factors:
FIGURE 8.2 Cost of Debt
Cost of equity
8.1b Cost of Preferred Stock
As a result, the cost of preferred stock is the
Cost of preferred stock
What would be the cost of preferred stock for a situation with a market price of SAR 78 and a dividend of SAR 6?
8.1c Cost of Common Stock
Cost of common stock
No tax advantage is associated with equity because dividends are paid
Why is the cost of common stock considered to be an opportunity cost?
A third approach defines the cost of equity based on an investor’s
Each of these three approaches have some basic similarities.
In this form, the required return is the sum of the dividend yield plus
Flotation costs
A firm’s earnings are growing at 7%. The common stock is currently paying
FIGURE 8.3 Cost of Equity
Calculate the risk premium using CAPM with these amounts: beta coefficient 1.15, risk-free rate 4%, average market rate 8%.
Dividends paid on preferred stock are tax deductible.
The return required by investors viewed as an opportunity cost refers to the:
