Lesson 5: Financing Operations and Expansion/FAR

Cost of New Issues of Common Stock

Determined by calculating the cost of common stock, net of underpricing and associated flotation costs

Weighted Average Cost of Capital

is straightforward: Multiply the individual cost of each form of financing by its proportion in the firm’s capital structure and sum the weighted values.

Underwriting costs

compensation earned by investment bankers for selling the security

Administrative costs

or issuer expenses such as legal and accounting costs

Underpricing

Difference between the market price and the issue price, which is the price paid by the primary market investors.

Cost of Capital

is an extremely important financial concept. It acts as a major link between the firm’s long-term investment decisions and the wealth of the firm’s owners as determined by the market value of their shares

Cost of Long-Term Debt

is the financing cost associated with new funds raised through long-term borrowing. Typically, the funds are raised through the sale of corporate bonds.

Net proceeds

from the sale of a bond, or any security, are the funds that the firm receives from the sale or represent the amount of money to be received minus any flotation costs.

Flotation costs

which represent the total costs of issuing and selling securities

Before-tax cost of debt

simply the rate of return the firm must pay on new borrowing

Cost of Preferred Stock

is the ratio of the preferred stock dividend to the firm’s net proceeds from the sale of the preferred stock

Gordon growth model

This is the constant-growth valuation model, also known as

Capital Asset Pricing Model

describes the relationship between the required return, rs, and the nondiversifiable risk of the firm as measured by the beta coefficient, b.

Quotation

A firm’s before-tax cost of debt for bonds can be found in any of three ways:……, calculation, or approximation