Chapter 12: The Cost of Capital
the percentages of the total capital represented by the debt and equity
Capital Structure Weights
the return that lenders require on the firm's debt
Cost of Debt
the return that equity investors require on their investment in the firm
Cost of Equity
fixed dividend divided by the current price per share of the preferred stock
Cost of Preferred Stock
An approach that assumes dividends grow at a constant rate in perpetuity. The price per share of the stock equals next periods projected dividend divided by the return that the shareholders require on the stock minus the growth rate
Dividend Growth Model Approach
A company that focuses only on a single line of business
Pure Play
Use of a weighted average cost of capital that is unique to a particular project, based on companies in similar lines of business.
Pure Play Approach
Calculates the cost of equity as a function of risk-free rate, the market risk premium, and beta
Security Market Line Approach
An approach that involves making subjective adjustments to the overall WACC
Subjective Approach
The particular mixture of debt and equity a firm chooses to employ
Target Capital Structure
the overall return the firm must earn on its existing assets to maintain the value of its stock
Weighted Average Cost of Capital (WACC)