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Equation 9-1.

Formula for the After Tax Cost of Debt (AT kd):

Equation Sheet for Exam Covering


Chapters 9, 10, 11 and 12
Equation 9-2. Formula for the Cost of Preferred Stock (kp):

k p=

AT kd = kd (1-T)
Where: kd = The before-tax cost of debt
T = The firms marginal tax rate

Equation 9-3. Formula for the Cost of Common Stock Equity (ks)
(Dividend Growth Model Approach):

Dp
( P pF)

Where: kp = The cost of the preferred stock issue; expected


return
Dp = The amount of the expected preferred stock
dividend
Pp = The current price of the preferred stock
F = The flotation cost per share

k s=

D1
+g
P0

Where: P0 = The current price of the common stock


D1 = The amount of the common stock dividend
expected
one period from now.

= The expected constant growth rate of the

companys
common stock dividends
Equation 9-4. CAPM Formula for the Cost of Common Equity (ks):

Equation 9-5. Formula for the Cost of New Common Equity (kn):

k s=k rf + ( k m k rf )
Where: ks = The required rate of return from the companys
common stock equity
krf = The risk-free rate of return
km = The expected rate of return on the overall stock
market

= The beta of the companys common stock. A

kn =

D1
+g
(P0F)

Where: kn = The cost of new common stock equity


P0 = The price of one share of the common stock
D1 = The amount of the common stock dividend
expected
to be paid in one year
F = The flotation cost per share

measure of
the amount of non-diversifiable risk

= The expected constant growth rate of the

companys
common stock dividends
Equation 9-6. Formula for the Weighted Avg. Cost of Capital
(WACC):

Equation 9-7. Formula for Marginal Cost of Capital (MCC) Break


Point:

ka = (WTd * AT kd) + (WTp * kp) + (WTs * ks)


Where: ka = The weighted average cost of capital (WACC)
WTd = The weight, or proportion, of debt used to finance
the
firms assets
AT kd = The after-tax cost of debt
WTp = The weight, or proportion, of preferred stock used
to
finance the firms assets
kp = The cost of preferred stock
WTs = The weight, or proportion, of common equity
used to
finance the firms assets
ks = The cost of common equity
Equation 12-4. The Formula for the Present Value of Preferred
Stock:

D
V p= p
kp

BP=

Limit
Proportion of Total

Where: BP = The capital budget size at which the MCC changes


(The break point)
Limit = The point at which the cost of the source of
capital
changes
Proportion of Total = The percentage of this source of
capital
in the firms capital structure

Equation 12-5. Formula for the Yield on Preferred Stock:

k p=

Dp
Vp

Where: Vp = Current Market value of preferred stock


Dp = Amount of the preferred stock dividend per period
kp = Required rate of return for this issue of preferred
stock
Equation 12-7. The Constant Growth version of the Dividend
Valuation Model:

Where: Vp = Current Market value of preferred stock


Dp = Amount of the preferred stock dividend per period
kp = Required rate of return for this issue of preferred
stock

Equation 12-11. The Yield, or Total Return, on Common Stock:

k s=

D1
P 0=
k sg
Where: P0 = Current price of the common stock
D1 = Dollar amount of the common stock dividend one
year from now
ks = Required rate of return for this common stock
investment

= Expected growth rate per period of common

D1
+g
P0

Where: P0 = Current price of the common stock


D1 = Dollar amount of the common stock dividend one
year from now
ks = Required rate of return for this common stock
investment

= Expected growth rate per period of common

stock dividends

stock dividends
Equation for Modified IRR:

PV outflows =

TV inflows
n

(1+ MIRR)

Where: PV = Present Value


TV = Terminal Value (Future Value at end of Project)
MIRR = Modified Internal Rate of Return

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