FIL 240 Lecture 15 Outline of Current Lecture I Component Costs of Capital a Debt b Preferred Stock c Common Stock II Marginal Cost of Capital MCC a Optimal Capital Structure b WACC Graph Current Lecture The Cost of Capital I Component Costs of Capital a Debt i Tier 1 Tier 2 ii Interest is a tax shield iii DATk dk 1 T iv T tax rate v Bank wants 8 your company is in the 20 marginal tax bracket 1 DAT 8 1 20 6 4 vi Megacorp is in the 35 marginal tax bracket 1 DAT 8 1 35 5 2 vii Bigger companies are taxed less than smaller companies 1 Wealthy family dAT 6 99 1 34 4 61 2 Poor family dAT 6 99 1 15 5 94 b Preferred Stock i Discount rate for preferred stock Pp D Kp ii Cost of preferred stock Kp D Pp c Common Stock i Cost of existing common stock Ks D1 P g ii Cost of new common stock KN D1 P F g iii F Float How much they ll charge to sell the stock 1 15 8mil 2 16 2mil 3 12 5mil These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II WACC 4 10 5mil capital 5 12 4mil capital 6 17 Unlimited capital iv If the last dollar costs more than the return on the whole project you don t start the project The last dollar is all that matters MMC Marginal Cost of Capital step graph a Optimal Capital Structure combination of debt equity with the lowest weighted average cost of capital WACC b
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