11-6 Cost of Capital Example-Geothermal Inc has the following structure. Given that geothermal pays 8%for debt and 14% for equity, what is the Company Cost of Capital? Portfolio Return=(3x8%0)+(7x14%0)=12.2% Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 11- 6 Irwin/McGraw-Hill Cost of Capital Example - Geothermal Inc. has the following structure. Given that geothermal pays 8% for debt and 14% for equity, what is the Company Cost of Capital? Portfolio Return = (.3x8%) + (.7x14%) =12.2%
11-7 Cost of Capital Example-Geothermal Inc has the following structure. Given that geothermal pays 8%for debt and 14% for equity, what is the Company Cost of Capital? Portfolio Return=(3x8%)+(7x14%)=12.2% Interest is tax deductible. Given a 35% tax rate, debt only costs us 5.2%o(1.e 8%x 65) WACC=(3x52%)+(.7x149)=11.49 Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 11- 7 Irwin/McGraw-Hill Cost of Capital Example - Geothermal Inc. has the following structure. Given that geothermal pays 8% for debt and 14% for equity, what is the Company Cost of Capital? Portfolio Return = (.3x8%) + (.7x14%) =12.2% Interest is tax deductible. Given a 35% tax rate, debt only costs us 5.2% (i.e. 8 % x .65). WACC= (.3x5.2%) + (.7x14%) =11.4%
11-8 WACC Weighted Average Cost of Capital (Wacc) The expected rate of return on a portfolio of all the firm's securities Company cost of capital= Weighted average of debt and equity returns Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 11- 8 Irwin/McGraw-Hill WACC Weighted Average Cost of Capital (WACC) - The expected rate of return on a portfolio of all the firm’s securities. Company cost of capital = Weighted average of debt and equity returns