B A 323 Chapter Notes - Chapter 10: Discounted Cash Flow, Dividend Yield, Preferred Stock
Document Summary
An overview of the weighted average cost of capital (wacc) When calculating the wacc, our concern is with capital that must be provided by investors. Capital components - one of the types of capital used by firms to raise funds. Weighted average cost of capital (wacc) - weighted average of the component costs of debt, preferred stock, and common equity. Wacc = (% of debt) (after-tax cost of debt) + (% of preferred stock) (cost of preferred stock) + (% of common equity) (cost of common equity) Before-tax cost of debt - interest rate the firm must pay on new debt. After-tax cost of debt - relevant cost of new debt, taking into account the tax deductibility of interested (used to calculate the wacc) After-tax cost of debt = interest rate on new debt tax savings. After-tax cost of debt = rd (1 t)
