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?
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.
3. Bond-Yield-Plus-Risk Premium:
ks = kd + RP.