Cost of Debt Cost of Debt is the required rate of return on investment of the lenders of a company. Pn=∑ j=1 (1+k。y k1=ka(1-T) 15-6
15-6 Cost of Debt is the required rate of return on investment of the lenders of a company. ki = kd ( 1 - T ) Cost of Debt P0 = I j + Pj (1 + kd ) j n j =1
Determination of the Cost of debt Assume that Basket Wonders BWhas $1, 000 par value zero-coupon bonds outstanding. BWbonds are currently trading at $385.54 with 10 years to maturity. BW tax bracket is 40% $0+$1,000 $38554= (1+kd)10 15-7
15-7 Assume that Basket Wonders (BW) has $1,000 par value zero-coupon bonds outstanding. BW bonds are currently trading at $385.54 with 10 years to maturity. BW tax bracket is 40%. Determination of the Cost of Debt $385.54 = $0 + $1,000 (1 + kd ) 10
Determination of the Cost of debt (1+k)10=$1,000/$38554 =2.5938 (1+k)=(25938)110) =1.1 d =.1or10% k1=10%(1-40) k:=6% 15-8
15-8 (1 + kd ) 10 = $1,000 / $385.54 = 2.5938 (1 + kd ) = (2.5938) (1/10) = 1.1 kd = .1 or 10% ki = 10% ( 1 - .40 ) ki = 6% Determination of the Cost of Debt
Cost of Preferred stock Cost of Preferred stock is the required rate of return on investment of the preferred shareholders of the company. k。=D,/P P 15-9
15-9 Cost of Preferred Stock is the required rate of return on investment of the preferred shareholders of the company. kP = DP / P0 Cost of Preferred Stock
Determination of the Cost of Preferred Steel Assume that Basket Wonders Bw has preferred stock outstanding with par value of $100, dividend per share of $6.30, and a current market value of $70 per share kp=$630/$70 P=9 15-10
15-10 Assume that Basket Wonders (BW) has preferred stock outstanding with par value of $100, dividend per share of $6.30, and a current market value of $70 per share. kP = $6.30 / $70 kP = 9% Determination of the Cost of Preferred Stock