BU393 Chapter Notes - Chapter 11: Discount Window, Net Present Value, Dissociation Constant
Document Summary
Computing the cost of debt, preferred shares and equity: net present values (npv): sum or net of all cash flows from a project. Chapter 11: cost of capital: discount the future cash flows back to present and subtract the pv of the cost of project, requires a discount rate. Firm has to earn at least the wacc or value of firm will fall: = return firm has to earn on investment - rate used to evaluate long term capital projects. = the discount rate used in npv & irr calculations. Cost of debt = (cid:396)etu(cid:396)(cid:374) that the fi(cid:396)(cid:373)"s le(cid:374)de(cid:396)s de(cid:373)a(cid:374)d o(cid:374) (cid:374)e(cid:449) (cid:271)o(cid:396)(cid:396)o(cid:449)i(cid:374)g: = interest rate on new borrowing & observe it from the interest rates quoted in bond markets. Interest expense and its tax deductability are reflected in cost of capital. Cost of preferred shares: about 5% of the a(cid:448)g fi(cid:396)(cid:373)"s (cid:272)ap is (cid:396)aised f(cid:396)o(cid:373) issui(cid:374)g preferred shares. D = annual dividend paid per share.
