BU393 Chapter Notes - Chapter 11: Net Present Value, Equity Premium Puzzle, Capital Structure
Document Summary
Computing the cost of debt, preferred shares, and equity. Required rate of return: specified return required each period by investors for a given level of risk to be satisfied that they"re sufficiently compensated. Cost of capital: cost, expressed as percentage rate, that firm must pay investors for use of debt and equity financing. Wacc computed by finding average costs of funds to firm. Wacc is measure used to evaluate investments so the rate must be adjusted and interpreted in light of how the funds will be used b/c the way funds are invested affects risk and return expected by investor. Cost of debt is the return that the firm"s lenders demand on new borrowing the interest rate on new borrowing (observed from interest rates quoted in bond market) Solve for kd when computing the yield to maturity: this is not the true cost of debt to a company.
