Core concepts
- 01Compound interest accumulates wealth; discounting brings future to present.
- 02Cost of capital: minimum return to compensate suppliers of capital.
- 03WACC: weighted average of after-tax cost of debt, preference, equity.
- 04CAPM for cost of equity: Rf + β(Rm − Rf).
- 05Marginal cost of capital relevant for new investment decisions.
Flowchart summary
Capital Structure Costs | Equity (Ke) ----- CAPM / DDM / Earnings Yield Preference (Kp) - Dividend / Net Proceeds Debt (Kd) ------- Interest × (1−t) / Net Proceeds | Weighted by Market Value -> WACC
Exam-critical pointers
- ⭐Market values preferred over book values for WACC weights.
- ⭐Beta levered = Beta unlevered × [1 + (1−t)(D/E)] (Hamada equation).
- ⭐Floatation costs reduce net proceeds — increases effective cost.
- ⭐Marginal cost of capital uses new issue cost, not historical.
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