BU393 Lecture Notes - Lecture 11: Pearson Education, Prentice Hall, Preferred Stock
Document Summary
This chapter clarifies the mystery of the hurdle rate or discount rate that was heretofore assumed as a given. Companies can finance their capital requirements by issuing different types of debt, preferred stock and common stock. After describing the salient features of each type of capital component, the author explains the methodology that can be used to determine a firm"s weighted average cost of capital (wacc). In particular, the tax implications, weighting procedures, and methods to calculate component costs are explained with examples. The use of the wacc as the hurdle rate when doing capital budgeting problems, and the process by which a firm can use the wacc to form optimal combinations of projects, are covered last. There are primarily 3 broad sources of financing that companies can avail of for raising capital: debt, common stock (equity), and preferred stock (hybrid equity). Figure 11. 1 (shown below) displays the three sources and their main suppliers.
