Cost of
Capital encompasses the expenses associated with financing a company's
operations through different sources. It comprises the cost of debt, preferred
stock, and common stock.
1. Cost of Debt:
- Represents the
cost of borrowing, including interest payments and fees.
- Calculated by
the interest rate on loans or bonds.
2. Cost of Preferred Stock:
- Involves fixed
dividend payments to preferred stockholders.
- Calculated by
dividing the annual preferred dividend by the net proceeds from issuing
preferred stock.
3. Cost of Common Stock:
- Reflects the
return shareholders expect for investing in equity.
- Calculated using
methods like DDM, Gordon Growth Model, or CAPM.
Overall:
- The Weighted
Average Cost of Capital (WACC) is a blend of debt, preferred stock, and common
stock costs.
How to calculate?
