BUS 295 Lecture Notes - Lecture 25: Risk-Free Interest Rate, Tax Rate, Risk Premium
Document Summary
Refers to the cost involved in floating a new issue of bonds or stocks (usually a payment to an investment banker). For every dollar of outside financing needed, the firm must obtain. Flotation costs may vary across debt and equity, so we have a measure of the weighted average flotation costs: fa = (e / v) fe + (d/ v) fd. Example 1: calculation of the cost of capital of a fictitious company. The firm"s capital structure consists of four main sources of financing: common equity: 50,500,000 shares now trading at . 00. The stock"s beta is said to be 1. 3: preferred equity: 5,000,000 shares of preferred stock. Each has the right to an annual dividend of sh. 90. The preferred are now trading at . 25: a bank loan: a variable rate bank loan of million priced at 35 bp (basis points) over the libor (london interbank offer rate).
