MGCR 341 Lecture Notes - Lecture 6: Preferred Stock, Weighted Arithmetic Mean, Market Risk

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Determining the cost of capital the role of financing sources in determining the firm"s overall cost of capital. One common approach use estimates produced by stock analysts, as they are forward looking: makes assumption that future dividend growth will continue at constant rate. Cost of preferred stock (rpfd) : firms may also raise capital by issuing preferred stock. Cost of capital is investment specific : cost of capital an opportunity cost (market return for projects of similar characteristics: depends primarily on the risk of that investment, not the source of funds. Second look at weighted average cost of capital. In practice : driven by risk of a company"s line of business and its leverage, varies widely across industries and companies, eg. selling food is fairly low-risk, but selling smartphones and related software is much riskier. Wacc incorporates benefit of interest tax deduction by using firm"s after-tax cost of capital for debt.

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