Chapter 10: The Cost of Capital

The following sections are included:

• Introduction

• Average Earnings Yield Method Versus Current Earnings Yield Method

• The Discounted Cash Flow Approach to Cost of Capital Determination

  • Gordon dividend model

  • Growth rate

• The Weighted Cost of Capital

  • Cost of debt

  • The cost of retained earnings and new equity

  • Cost of preferred stock

  • The logic and procedure of weighted cost of capital

• The Marginal Cost of Capital (MCC)

• The Chase Manhattan Model Approach to Cost of Equity Capital

  • The CAPM approach to cost of equity capital estimation

  • Levered beta (β_L) versus unlevered beta (β_U)

  • The chase approach to cost of equity capital estimation

• Summary

• Appendix 10A — M&M Propositions 1 and 2

• Appendix 10B — A Mathematical Approach to MCC