Principles of Finance · free preview
The Costs of Debt and Equity
The cost of debt is the yield to maturity on the firm's bonds adjusted for the tax shield, the cost of equity is the CAPM's required return, and both are market prices of each claim's risk, read from current conditions rather than historical averages.
1. The cost of debt
The cost of debt
2. The cost of equity
The cost of equity
3. Market values and current conditions
Market values and current conditions
4. Feeding the weighted average
Feeding the weighted average
5. Reading the cost of debt
Where does a firm read its pre-tax cost of debt?
6. The after-tax computation
A firm's debt yields 6.312 percent and its tax rate is 21 percent. What is its after-tax cost of debt?
7. The shield's mechanics
On a 1,000 dollar loan at 6.312 percent with a 21 percent tax rate, what is the firm's net annual interest cost?
8. The cost of equity's source
How does a firm estimate its cost of equity?
9. The component comparison
A firm's after-tax cost of debt is 4.99 percent and its CAPM cost of equity is 9.6 percent. What explains the gap?
10. Market versus book weights
Why must the WACC's component weights use market values rather than book values?
11. The debt cost's market gauge
What three-word bond measure, the discount rate equating promised payments to market price, names the pre-tax cost of debt? Answer in lowercase.
12. The equity cost's model
What four-letter acronym names the model that estimates the cost of equity from beta and the market premium? Write the acronym.
13. The tax shield's subtraction
In the after-tax cost of debt, the pre-tax rate is multiplied by one minus what rate? Answer with one letter.
14. The risk ordering
Which component of capital carries the higher cost, debt or equity? Answer with one word.
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