Cost of Capital

The "Problem-set Solutions" are now posted for Chapter 11 on the course website.

Our discussion yesterday pertained to historical cost of capital computations. If a company was to issue new preferred and/or common stock, one would have to incorporate a fee that the company has to pay to the investment banker for selling the "new" security. This fee is referred to as the "floatation cost." Since it is a cost, the firm's cost of capital for preferred and/or common will increase. For our equation for "cost of NEW common stock equity," the refinement to our basic equation is as follows: [(EXPECTED DIVIDEND/(PRICE-FLOATATION COST)] + GROWTH RATE OF DIVIDEND. If you were calculating the "Cost of New Preferred," you would make the same adjustment by inserting the floatation cost into the equation.