Chapter 10 today, plus a quiz.Taking a while to get to new content today. Lots of questions over the homework.
Firms raise long-term capital via long-term debt, preferred stock, and common stock. Common stock capital can be further divided into retaining current earnings, and issuing new common stock. Each method has its own associated costs.
Weighted Average Cost of Capital (WACC) is equal to the weighted cost of the debt plus the weighted cost of preferred stock, plus the weighted cost of common stock equity.
The mix of these alternatives is the firm’s capital structure.
Relevant Costs of capital:
- Only debt needs tax adjustment
- Dividends paid on stock are not tax deductible.