The Cost of Capital. Corporate Finance. Dr. A. DeMaskey. Learning Objectives. Questions to be answered: What is the cost of capital? What are the component costs? What is the target capital structure? How is each of the component costs and weights estimated?
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The Cost of Capital
Dr. A. DeMaskey
WACC= wdkd(1 - T) + wpskps + wsks
where: wi = proportion of source of capital used in the
capital structure; ki = marginal cost of source of capital;
T = corporate tax rate.
kd,AT= kd,BT(1 - T).
Three ways to determine the cost of equity, ks:
1.CAPM: ks= kRF + (kM - kRF)b
= kRF + (RPM)b.
2.DCF: ks = D1/P0 + g.
ks = kd + RP.