Cost of Capital- Topic week 9

Hi! Great to see you again!

How was your holiday?

Did you go somewhere?

Our topic today is about: Cost of Capital

The Cost of Capital simply tells us how expensive it is for the firm to raise capital.

Which of the following is correct?

• The overall Cost of Capital of the firm will be a blend of the costs of the different sources of financing

• A firm has to compensate investors for putting their money with the firm. This compensation = cost to the firm

• Paying interest to the debt holders is the part of cost of capital

• Dividends to shareholders is also a part of cost of capital

What does the Cost of Capital represent?

• Historical expenses

• The cost of obtaining funds

• Future investment returns

• Operating cost

To calculate the cost of capital, we use the formula of WACC (Weighted Average Cost of Capital).

WACC considers the weight of each component based on its market value in the capital structure.

Any question for this formula?

Which component is NOT typically considered in the calculation of the Weighted Average Cost of Capital (WACC)?

• Cost of debt

• Cost of Equity

• Cost of preferred stock

• Cost of retained Earnings

Which of the following is a key factor in determining a company's cost of debt?

• Maker share

• Credit rating

• Dividend yield

• Earning per share

What is the Cost of Equity?

• The interest rate on company debt

• The cost of obtaining preferred stock

• The return required by equity investors

• The cost of retained earnings

How is the weight of each component determined in the WACC formula?

• Book value of the component divided by the total book value of the firm

• Market value of the component divided by the total book value of the firm

• Book value of the component divided by the total market value of the firm

• Market value of the component divided by the total market value of the firm

In the context of WACC, what is the tax shield and how does it impact the cost of debt?

• Tax shield increases the cost of debt

• Tax shield decreases the cost of debt

• Tax shield has no impact on the cost of debt

• Tax shield increases the cost of equity