Cost of debt
When individuals use the cost of debt, they should know the measurement of the interest rate, or the yield paid to the bondholders. When analyzing the cost of debt, people should know that it's an effective rate that businesses are willing to pay on the current debt that they have accrued. The cost of debt is a measurement of the before or after tax returns. Considering the case that individuals can deduct the interest, makes the tax after cost more popular than the before tax. A business will typically use different bonds, loans, and different techniques for debt. This is a measure that individuals pay to a business to use the debt financing. This means of measurement is a good opportunity for investors to get an idea of how risky the business endeavors are when compared to other companies. This is because a riskier business will typically have an increased cost of their debt. "In order to obtain the after tax rate, you must multiply the before tax rate by one minus the marginal rate (before tax rate X (1-marginal tax)). However, if a business has debt and it is in the form of a single bond, and it is paid at 5% than the before tax cost of debt would only be 5%. But if a businesses marginal tax rate is 40%, than the businesses after tax cost of debt would be 3% (5% x (1-40%)) (Answers, 2007, p.1)." Cost of preferred stock

The fact that the cost of debt and the preferred stock both require consistent annual payments make them both quite similar. However, they differ in the case that there is not a maturity date in which a principal payment is paid. When calculating the cost of a preferred stock the tax adjustments are not used. The reasoning for this is because, interest must be paid on debt, "but the dividend payments on the preferred stocks are not tax deductible (Kennon, 2007, p.1)." Cost of common equity

Common equity comes from the retained earnings, but can also come from the issuing of the new common stocks. Individuals should realize...

...For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company's average business activities it is reasonable to use the company's average cost of capital as a basis for the evaluation. A company's securities typically include bothdebt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital. However, a rate of return larger than the cost of capital is usually required.
The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company can be modeled as the risk-free rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous (not linked to the cost of debt), the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred...

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Table of Contents
Cost of Capital 2
Value of Equity 2
Cost of Equity 2
CAPM Model 2
Dividend Growth Model 3
Value of Debt 3
Cost of Debt 4
WACC (Weighted Average Cost of Capital) 4
Comparison to Joanna Cohen’s Analysis 4
Financial Statement Analysis 5
Nike Inc. 5
Financial Ratios 6
Leverage Ratios 6
Efficiency Ratios 6
Liquidity Ratios 7
Profitability Ratios 7
Valuation Ratios 7
Conclusion 8
Appendix A – Ratio Calculation 9
Leverage Ratios 9
Efficiency Ratios 9
Liquidity Ratios 9
Profitability Ratios 10
Valuation Ratios 10
Cost of Capital
Value of Equity
Cohen's calculation considered the book values to calculate the proportion of equity for calculating the value of WACC which should only be done if the target or market values are not available. In order to determine a more realistic cost of equity, it is recommended to use the market value. The current market share price of Nike as of 2001 is $42.09 and there are 271.5 total shares outstanding.
Therefore the market value of equity is:
Current share price * Average shares outstanding: (42.09 * 271.5) = $11,427.44 million
This figure is much higher than the book value of $3,494.5 million that Cohen used to calculate the value of equity.
Cost of Equity
There are two approaches that can be used to calculate the cost of...

...BUSINESS RESEARCH METHODOLOGY
BOARD EFFECTIVENESS AND COST OF DEBT
by :
FARUQ AKURAT
100810251004
ECONOMIC FACULTY
JEMBER UNIVERSITY
2011 / 2012
Board Effectiveness and Cost of Debt
ABSTRACT
Does the board of directors influence cost of debt financing? This study of a sample of Spanish listed companies during the period 2004–2007 provides some evidence about the question. The results suggest that two board attributes – director ownership and board activity – appear to influence in the risk assessment of debtholders because of their ability to reduce agency cost and information asymmetry. We also find a non-linear relationship between board size and cost of debt, suggesting that from certain levels the benefits of large boards may be outweighed by the cost of poorer communication and increased decision-making time.
Previous Literature and Hypotheses
Some studies have specifically addressed the effect of the board of directors on the cost of debt financing (Anderson et al., 2004; Ashbaugh-Skaife et al., 2006; Bhojraj and Sengupta, 2003; Ertugrul and Hegde, 2008; Piot and Missonier-Piera, 2007). Their results are consistent with the argument that debtholders favour monitoring mechanisms that are likely to limit managerial opportunism and consider board monitoring effectiveness as a...

...What is cost of capital?
The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. It is used to evaluate new projects of a company, as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
Importance
The concept of cost of capital is a major standard for comparison used in finance decisions. Acceptance or rejection of an investment project depends on the cost that the company has to pay for financing it. Good financial management calls for selection of such projects, which are expected to earn returns, which are higher than the cost of capital. It is therefore, important for the finance manager to calculate the cost of capital, which the company has to pay and compare it with the rate of return, which the project is expected to earn.
In capital expenditure decisions, finance managers go on accepting projects arranged in descending order of rate of return. He stops at the point where the cost of capital equals to the rate of return offered by the project. That is, the finance manager finds out the break-even point of the project. Accepting any project beyond the break-even point will cause financial loss for the company.
The cost of capital is a guideline for determining the optimum capital...

...ogCost of capital
First of all I would like to say the I wanted to calculate the cost of debt and cost of equity but the information given in the statements are missing the items needed to calculate the cost of debt and the cost of equity but I would like to analyze the information related to this part
The market capitalization already increased in year 2010to 7,016 million from the previous year which was 3,805 million in year2009.also we can see the share price started year2010 with equal to 180,168,300 and ended the year with 143,885,400 this time it’s showing decreasing number not increasing as usual we need to look to the property plant and equipment its percentage increased as it was 69.7% in year 2009 to 70.3% in year 2010,we can have a look to the receivables and prepayments and this was higher in year 2009 with 13% than it was 2010 with 10.4% .the inventories percentage already decreased from year 2009 to 2010 as we see it was 0.2%in year2009 then it became 0.1% .we don’t need to forget about looking to the shareholders equity as it was 3,,641 million in year 2010 and was lower in the year of 2009 with 2,621 million and it was higher in year 2009 than it was in year 2009,the total assets were increased as we see it was 11,398 in year 2009 and it was 13,240 in year 2010 ,when we look to the revenue we can find that it’s as other equities increasing in a great way as it was...

...unlevered beta for the firm; the financial risk refers to the levered beta. An unlevered beta assumes zero debt. The Hamada equation illustrates that when a firm increases its debt, the financial leverage also increases the firm's risk and, in turn, its beta. Levered beta can be calculated based on the unlevered beta, tax rate, and debt-to-equity ratio.
Unlevered Beta: Beta levered/[1+(1-tax rate)x(D/E)]
Levered Beta: (D/E*(1-Tax Rate)+1)*Unlevered Beta
What Does Market Risk Premium Mean?
The difference between the expected return on a market portfolio and the risk-free rate.
What Does Weighted Average Cost Of Capital - WACC Mean?
A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.
The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing...

...Debt and equity financing
Debt and equity financing is the sources of funding can provide you with all the cash you need to start or grow your business.
Debt financing
Debt financing means borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed-upon interest, at a later date. When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors can be considered as debt financing.
For one thing, debt financing can be used to fund just about any kind (or size) of business. The biggest disadvantage of using debt to finance growth is that debt requires repayment. Debt has to be repaid every month, regardless of how well a business is doing. That means that if your sales take a dip, you may find yourself unable to make your monthly loan payment.
Apollo Food Holdings Bhd’s long-term debt that ended in April 2014 was RM0.0 Mil. Apollo Food Holdings Berhad is not using debt-financing but they are focusing on equity-financing.
The advantages of the company not using debt financing is that some new businesses sometimes find it difficult to make regular loan payments when they have irregular cash flow. In this way, debt financing can leave businesses vulnerable to economic...

...Dr. Sudhakar Raju
FN 6100
QUESTIONS ON CHAPTER 15 (COST OF CAPITAL)
1.) The Wind Rider Company has just issued a dividend of $2.10 per share on its common stock. The company is expected to maintain a constant 7% growth rate on its dividends indefinitely. If the stock sells for $40 a share, what is the company’s cost of equity?
2.) The Ball Corporation’s common stock has a beta of 1.15. If the risk free rate is 5% and the expected return on the market is 12%, what is Ball Corp.’s cost of equity capital?
3.) Stock in Parrothead Industries has a beta of 1.10. The market risk premium is 8% and T-bills are currently yielding 5.50%. Parrothead’s most recent dividend was $2.20 per share and dividends are expected to grow at a 5% annual rate indefinitely. If the stock sells for $32 per share, what is the best estimate of Parrothead’s cost of equity?
4.) Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share. What is the bank’s cost of preferred stock?
5.) Legend, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 107% of face value. The issue makes semiannual payments and has an embedded cost of 10% annually. What is Legend’s pretax cost of debt? If the tax rate...