FIN 345 1nd Edition Lecture 16Outline of Current LectureChapter 121. Cost of newly issued common stock (external equity)a. External equityi. Based on the cost of retained earningsii. Adjusted for flotation costs (the expenses of selling new issues), F (stated in decimal form)2. Target capital structurea. Optimal capital structurei. Percentage of debt, preferred stock, and common equity that will maximize the price of the firms stock3. Weighted average cost of capital (WACC)a. WACC: i. A weighted average of the component costs of debt, preferred stock, and common equity4. Marginal cost of capitala. MCC:i. The cost of obtaining another dollar of new capitalii. The weighted average cost of the last dollar of new capital raisedb. MCC Schedulei. Marginal cost of capital schedule: a graph that relates the firm’s weighted average of each dollar of capital to the total amount of new capital raisedii. Reflects changing costs depending on amounts of capital raisediii.5. Break PointThese 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.a. BP:i. The dollar value of new capital that can be raised before an increase in the firm’s weighted average cost of capital occursii. Break point= max amount of lower cost of capital given type divided by the proportion of this type of capital in the capital structureiii. Break points depend on capital structure
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