FINE 2000 Lecture Notes - Lecture 11: Net Present Value, Preferred Stock, Project Y
2 May 2017
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Chapter 14: cost of capital (lo2: the pretax cost of debt is the ytm of the company"s bonds, so: Rd = 0. 0762(1 0. 35) = 0. 04953 or 4. 953% The after-tax rate is more relevant because that is the actual cost to the company. (lo3) here we have the wacc and need to find the debt-equity ratio of the company. Wacc = 0. 0850 = 0. 11(e/v) + 0. 061(d/v)(1 0. 35) Now we must realize that the v/e is just the equity multiplier, which is equal to: The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company"s debt, so: So, the total value of the company is: And the book value weights of equity and debt are: The market value of equity is the share price times the number of shares, so:
