CHAPTER 9 The Cost of Capital Calculating the weighted average cost of capital WACC = wdkd(1-T) + wpkp + wcks The w’s refer to the firm’s capital structure weights. The k’s refer to the cost of each component. Should our analysis focus on before-tax or after-tax capital costs? Stockholders focus on A-T CFs. Therefore, we should focus on A-T capital costs, . | CHAPTER 9 The Cost of Capital Sources of capital Component costs WACC Adjusting for flotation costs Adjusting for risk 9-1 What sources of long-term capital do firms use Long-Term Capital I I ---F Preferred Stock Common Stock I r Retained Earnings New Common Stock 9-2 Calculating the weighted average cost of capital WACC Wdkd 1-T Wpkp Wcks The w s refer to the firm s capital structure weights. The k s refer to the cost of each component. .
