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BA 323: Ch. 12

Terms in this set (66)

WACC (Weighted Average Cost of Capital)
-Is the minimum return a company needs to earn to satisfy all of its investors, including stockholders, bondholders, and preferred stockholders.
-This is the cost of capital for the firm as a whole, and it can be interpreted as the required return on the overall firm
capital
Debt, Preferred Stock, Common Stock, and Equity are all sources of _______ for a company.
1. Equity
2. Debt
3. Preferred Stock
What are the 3 components of capital structure?
1. Debt
2. Preferred Stock
3. Equity
List the 3 components of capital structure (Debt, Equity, Preferred Stock) in order of riskiness - with the 1st being the least risky, and the last being the riskiest.
providers
The cost to a firm for capital funding = the return to the _______ of those funds
I/Y
Yield to Maturity (YTM) is what function on the financial calculator?
1. Debt → paid first (least risk)
2. Preferred Stock
3. Equity → paid last (most risk)
1. Debt
2. Preferred Stock
3. Equity
Who gets paid first? Who gets paid last?
risk
Cost of Capital Basics
The return earned on assets depends on the ______ of those assets.
market
Cost of Capital Basics
A firm's cost of capital indicates how the ______ views the risk of the firm's assets.
required return
Cost of Capital Basics
A firm must earn at least the ______ _____ to compensate investors for the financing they have provided.
discount
Cost of Capital Basics
The required return is the same as the appropriate ________ rate.
No! Equity is the riskiest and therefore should have the highest returns
Over time, would you take equity risk if you got paid less than a bond?
Cost of Equity
The __________ is the return required by equity investors given the risk of the cash flows from the firm.
1. Dividend Growth Model
2. SML or CAPM
Two major methods for determining the Cost of Equity:
1.
2.
.1307 or 13.07%
Example: Your company is expected to pay a dividend of $4.24 per share next year. Dividends have grown at a steady rate of 6% per year and the market expects that to continue. The current stock price is $60. What is the cost of equity?
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