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StockCost of Common EquityNormal Growth ModelCost of Retained EarningsCost of New Common StockCost of New Common StockCapital Budget of $100 millionCapital Budget of $150 million  Fonts UsedDesign TemplateEmbedded OLE Servers Slide Titles˜ 6> _PID_GUIDäAN{FD94DEE0-5666-11D1-AA88-988806C10000}.+2 Ö³Raising funds to pay for*!!! !. .2 capital projects!!.--û¼"Systemn-ð&TNPP &ÿÿÿÿ´bºEquation ºEquation.30º,Microsoft Equation 3.0̘Í0ôbºEquation ºEquation.30º,Microsoft Equation 3.0̘Í0à ´bºEquation ºEquation.30º,Microsoft Equation 3.0̤Í0ôbºDocument ºWord.Document.80º.Microsoft Word Document̤Í\0ôbºDocument ºWord.Document.80º.Microsoft Word Documentòˆ/È 0ÒÕä·DTimes New Roman¶b¶bD´b·ñ0h´bh´bÉò0·DMonotype Sorts¶b¶bD´b·ñ0h´bh´bÉò0 ·DSymbole Sorts¶b¶bD´b·ñ0h´bh´bÉò0©  @£nÿý?" dd@ÿÿïÿÿÿÿÿÿ  @@``€€ ¼ð´ð¨P=     ¯ð¸2ð$E!ÐRäåâ çí£ÜÞˆwÿk‹2ð$~þñSÏ,âÞiÖ\–ýÿëk‹2ð$nšõˆnOU’f¿mF}âŸÿs‹2ð$Z�òèDz“ùÖQà@ dÀØÿ•V‹ð$ÿ‹ð$ÿ‹ð$ÿ‹ð$ÿ‹ð$ÿ‹2ð$†û?£HQ° 9,ÒmÈöÿ€s‹c ð$�ƒ¿Àÿ@ñ÷ðó€Ð‚ÿ úgþý4)d)dt´bÉò0l´b¦¤Nýÿÿ¦ÿÿÿpûppû@ <ý4BdBd´å‡¶b¦¤ ÿÿúgþý4ddt´bÉò0l´b¦¤Jûÿÿ¬ÿÿÿpû@ pûp<ý4!d!d´å‡¶b¤ÿÿ?Ù Ú%OÙ Ú=ðóŸ¨Cost of Capital¡HŸ¨)Raising funds to pay for capital projects¡**,óŸ¨Cost of Capital¡BŸ¨¦k0, the required rate of return in NPV/IRR the hurdle rate for the acceptance of a project the rate of return that will leave the market price of the stock unchanged ¡$§çÿ¥óŸ¨$Explicit Costs of Specific Sources¡%$0Ÿ¨` Debt Preferred Stock Common Equity Retained Earnings (Internal) New Common Stock (External)¡(&;&;óŸ¨Explicit Cost of a Source¡0Ÿ¨ßthat discount rate which equates the present value of the funds received by the firm, net of underwriting and other flotation costs, with the present value of the expected outflows very similar to IRR and yield to maturityó ó Ÿ¨Cost of New Debt¡6Ÿ¨ÕSolve the equation for k Adjust for the tax-deductibility of interest ki = k (1-t) I0 = 980, C=40/period, n=40 periods 980 = 40(pvifa-k-40)+1000/(1+k)40 k=4.1%/period or 8.2%/year ki = .082 (1-.40) = 5.02%/year ¡lÖGçÿ çÿ/çÿçÿª>F8/ ó Ÿ¨Cost of Preferred Stock¡6Ÿ >Perpetual (nÝð¥ð) Pays a constant dividend (D1= D2=& = Dn) I0 = D / kP or kP = D / I0 I0=98.50, P0=110, Par=100, D=7.5% kP = .075x100 / 98.50 = 7.61% ¡.  €€ˆçÿ€ˆçÿ€ˆçÿ€ˆçÿ€ˆçÿ€ˆçÿ€ˆçÿ€ˆçÿ €ˆçÿ€ˆçÿ€ˆçÿ€ˆçÿ€ªP5 ."óŸ¨Cost of Common Equity¡6Ÿª óŸ¨Normal Growth Model¡6Ÿ If ke >= g and g ®ð¥ð then P0 = D1/(ke - g) ke=D1/P0 + g = dividend yield + growth rate D1 =2.00, P0 =$40 and g = 4% ke= 2/40 + .04 = .09¡ôŽçÿ €ˆçÿ€ˆçÿ€ˆçÿ €ˆçÿ€ˆçÿ€ˆçÿ&€ˆçÿ €ˆçÿ€ˆçÿ€ªPKó Ÿ¨Cost of Retained Earnings¡ Z0Ÿ ÜCost of retained earnings is NOT zero They are not  free Opportunity cost what shareholders could make investing their dividends elsewhere in another like company these other companies earn a return of ke Cost of retained earnings is ke ¡lKƒ K�çÿçÿª$Ëó Ÿ¨Cost of New Common Stock¡þÿÿÿ ) 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