Ch 10

• rd is the marginal cost of debt capital
• rp is the marginal cost of preferred stock
• debt is tax deductible
• preferred stock isn't tax deductible
• cost of preferred stock formula: rp = Dp/Pp
• preferred stock is more risky than debt to investors
• firms try to pay preferred dividend even though it's more risky than debt because if they don't, they can't pay common dividend, it's difficult to raise additional funds, and preferred stockholders may gain control of firm
• preferred stock will often have a lower before tax yield than the before tax yield on debt because corporations own most preferred stock
• rs is the marginal cost of common equity
• rs using CAPM: rs = rrf + RPm(b)
• rs using DCF: rs = D1/P0 + g
• rs using Bond-Yield-Plus-Risk-Premium: rs = rd + RP
• cost of retained earnings is cheaper than issuing new stock because they won't have to pay flotation costs
• retained earnings with flotation cost equation: re = (D0(1+g))/(P0(1-F))+g
• factors firms can't control that influence WACC: interest rates, tax rates
• factors firms can control that influence WACC: firm's capital structure, firm's dividend policy, firm's investment policy