When a firm uses debt financing, it needs to find the cost of this source. When A. The cost of equity can be the cost of retained earnings or the cost of new common debt is used the interest on that debt is a cost for the firm. So how do we stock. measure the anticipated interest payment on new debt? When you see 'cost of common equity' or 'cost of equity" know that there are It is approximated with which variable? three methods for approximating this value. What are the three ways to measure When a firm uses preferred stock financing, it needs to find the cost of this cost of equity source. Investors will not be willing to invest in the firm or project unless their B. Dividend (D) / Price (P) (this is from Chapter 9) required return threshold is met. For example, I would not invest in any stock C. The cost of new equity issuance (issuing new stock) is higher than the cost of equity if I thought there was a good chance that I would lose money. So how can we from retained earnings. This means when flotation cost is considered the () should measure the required return of investors on preferred stock? be larger than equity from retained earnings. CAPM approach in 10-5A - this method uses beta (see chapter 8 for a refresher of the CAPM) D. The Yield to Maturity (VY) on current or recent outstanding bonds (this is from Chapter 8) Bond Yield + Risk Premium Approach This method uses a Risk Premiurn that represents the additional required return from investing in stocks over bonds In this method the Bond Risk Premium is given in the problem set-up. The Bond Yield can be found as the yield to maturity on the firm's debt (1/1) investors require more return for investing in stocks over bonds because common stocholders are behind bondholders and bankruptcy claimants This Risk Premium is different than the "Market Risk Premiurn' used in the CAPM. Remember the Market Risk Premium is the the extra required return from investing in the market over the risk free rate. The Discounted Cash Flow (DCF) approach uses the valuation model from Chapter 9 where now we solve for . This appoximation method uses dividends Be careful that the Upcoming Dividend is used in the formula. Investors consider future cash flows in these models. So be careful in using dividends in this formula. D1 = DO'(1+g) where g is in decimal form The cost of NEW common equity considers the cost of new issuance in its approximation . These are called flotation costs and can be significant. . In this class flotation cost will be provided as a percentage and will only be used with the DCF method. The steps for considering this added cost to using equity is in section 10-8b of the book When a firm uses debt financing, it needs to find the cost of this source. When A. The cost of equity can be the cost of retained earnings or the cost of new common debt is used the interest on that debt is a cost for the firm. So how do we stock. measure the anticipated interest payment on new debt? When you see 'cost of common equity' or 'cost of equity" know that there are It is approximated with which variable? three methods for approximating this value. What are the three ways to measure When a firm uses preferred stock financing, it needs to find the cost of this cost of equity source. Investors will not be willing to invest in the firm or project unless their B. Dividend (D) / Price (P) (this is from Chapter 9) required return threshold is met. For example, I would not invest in any stock C. The cost of new equity issuance (issuing new stock) is higher than the cost of equity if I thought there was a good chance that I would lose money. So how can we from retained earnings. This means when flotation cost is considered the () should measure the required return of investors on preferred stock? be larger than equity from retained earnings. CAPM approach in 10-5A - this method uses beta (see chapter 8 for a refresher of the CAPM) D. The Yield to Maturity (VY) on current or recent outstanding bonds (this is from Chapter 8) Bond Yield + Risk Premium Approach This method uses a Risk Premiurn that represents the additional required return from investing in stocks over bonds In this method the Bond Risk Premium is given in the problem set-up. The Bond Yield can be found as the yield to maturity on the firm's debt (1/1) investors require more return for investing in stocks over bonds because common stocholders are behind bondholders and bankruptcy claimants This Risk Premium is different than the "Market Risk Premiurn' used in the CAPM. Remember the Market Risk Premium is the the extra required return from investing in the market over the risk free rate. The Discounted Cash Flow (DCF) approach uses the valuation model from Chapter 9 where now we solve for . This appoximation method uses dividends Be careful that the Upcoming Dividend is used in the formula. Investors consider future cash flows in these models. So be careful in using dividends in this formula. D1 = DO'(1+g) where g is in decimal form The cost of NEW common equity considers the cost of new issuance in its approximation . These are called flotation costs and can be significant. . In this class flotation cost will be provided as a percentage and will only be used with the DCF method. The steps for considering this added cost to using equity is in section 10-8b of the book