COST OF CAPITAL
• PD company is considering for the capital mobilization
for investment opportunities in the coming time.
• Optimal capital structure that the company has to
maintained:
+ Long-term debt: 45%
+ Preferred stocks: 2%
+ Common stocks: 53%
• Expected net income of PD 137,8 mil. USD.
• Planned dividend rate: d = 45%.
15
COST OF CAPITAL
• However, the company can only borrow a
maximum of USD 90 million with interest rate
kd1 = 10%, loans exceeding this amount will
be subject to interest rate kd2 = 12%.
Corporate income tax rate: T = 25%
17
COST OF CAPITAL
Other information of mobilization conditions:
• The company can an unlimited number of preferred
shares at the selling price of Pp = 100 USD, annual
dividend of Dp = 10 USD and issue cost Fp = 2.5%.
• The company can issue unlimited public shares at an
issue cost of Fe = 10%. The current selling price of
public shares is P0 = 23 USD, the company's dividend
last year was D0 = 1.15 USD / share and the
expected growth rate of dividend is g = 8%.
16
COST OF CAPITAL
With the above information, please:
• Determine the BPs on the MCC graph.
• Determine the WACC at the interval between
the breakpoints and draw the MCC graph of
PD company.
18
 COST OF CAPITAL COST OF CAPITAL
• kd = 10%
It is known that PD company may have projects with the data
• T = 25%,
shown in the table below, build an Investment Opportunity
Schedule (IOS) graph, and combine this graph with MCC graph to • kd(1-T) = 10%(1-0,25) = 7,5%
determine the company's optimal investment plan and capital
budget for the coming year.
• Dp = 10 USD, Pp = 100 USD, Fp = 2,5%
• kp = Dp / [ Pp(1 - Fp)] = 10 /97,5 = 10,3%
Project Investment capital (mil. Rate of return (%)
USD)
• D0 = 1,15 USD; P0 = 23 USD; g = 8%
A 50 13,0 • ks = (D0(1 +g)/P0) + g = (1,242 / 23) + 8% = 13,4%
B 50 12,5 • D0 = 1,15 USD; P0 = 23 USD; g =8% ; Fe = 10%
C 80 12,0
• ke = [D0(1 + g)/P0(1 – Fe) ] + g
D 80 10,2
= [1,15(1 + 0,08)/ 23(1 - 0,1) ] + 8% = 14%
19 20

COST OF CAPITAL COST OF CAPITAL

• Breakpoints determination:
• New capital mobilized must have components
• A. Breakpoint when finish using RE (BP1)
that reflect optimal capital structure. When
the company has not used up the retained The profit that can be retained for reinvestment
earnings for next year, we have: is 137.8 (1 - 0.45) = $ 75.8 million. When the
company has not used up these retained
WACC = Wdkd(1-T) + Wp.kp + Ws.ks
earnings ($ 75.8 million), WACC will not
= (0,45)(10%)(1 - 0,25) + (0,02)(10,3%) + increase. The BP1 breakpoint will appear
(0,53%)(13,4%) when the above money is used up, the
= 10,683% company must issue new public shares to
maintain its target capital structure.
21 22
 COST OF CAPITAL COST OF CAPITAL

• Breakpoint due to change in interest rate (BP2)

• BP1 is the total capital that can be mobilized
without issuing new public shares, we have:
• BP1 = RE / Weight of common equity
75.800.000 / 0.53 = 143.018.868
• The company can only borrow an additional $ 90
million at an interest rate of kd1 = 10%, the higher
= amount will incur an interest rate of kd2 = 12%,
which leads to the change of WACC.
• Let BP2 be the total amount of capital that can be
mobilized with the interest of the loan component of
kd1 = 10%, we have:
• BP2 = Additional mobilized loan / Weight of long-
term debt
= 90.000.000 / 0.45 = 200.000.000
23 24

COST OF CAPITAL COST OF CAPITAL

• Conclusion:
• There are two breakpoints in the MCC graph for
WACC when common equity is retained earnings (mobilized capital is
PD company, which are the mobilization levels of less than $ 143,000,000)
143 million USD and 200 million USD. Once these
Capital component Proportion Component cost (%) Weighted component
levels are reached, funding conditions become x = cost (%)
more difficult, causing the cost of one (or several) Debt (Kd = 10%) 0,45 7,5 3,375
component of capital to increase, resulting in an Preferred shares 0,02 10,3 0,206
increase in WACC. Common shares (RE) 0,53 13,4 7,102

• -> WACC should be calculated at the interval 1,00 WACC=10,083

between the breakpoints when the cost of capital

Of the 100$ mobilized funds, there are 45$ of loan (kd = 10%), 2$ of preferred
component changes shares (kp = 10.3%), and 53$ of common shares (ks = 13.4%).
25 26
 COST OF CAPITAL COST OF CAPITAL

WACC when common equity is raised by issuing new shares (capital

raised is between 143,000,000 USD and 200,000,000 USD) WACC when the interest rate increases to kd = 12% (mobilized
capital exceeds 200,000,000 USD)
Capital component Propotion Component cost (%) Weighted component
x = cost (%) Capital component Proportion Component cost (%) Weighted component
x = cost (%)
Debt (Kd = 10%) 0,45 7,5 3,375
Debt (Kd = 10%) 0,45 9 4,05
Preferred shares 0,02 10,3 0,206
Preferred shares 0,02 10,3 0,206
Common shares( new 0,53 14,0 7,42 Common shares 0,53 14,0 7,42
common shares)
1,00 WACC=11,676
1,00 WACC=11,001
Of the 100$ mobilized funds, there are 45$ of loan (kd = 12%), 2$ of preferred
shares (kp = 10.3%), and 53$ of common shares (ks= 14%)
Of the 100$ mobilized funds, there are 45$ of loan (kd = 10%), 2$ of preferred
shares (kp = 10.3%), and 53$ of common shares (ks= 14%) 27 28

COST OF CAPITAL COST OF CAPITAL

PHỐI HỢP ĐỒ THỊ CHI PHÍ VỐN BIÊN (MCC) VÀ ĐỒ THỊ CƠ HỘI ĐẦU TƯ (IOS) ĐỂ

• Conclusions:
XÁC ĐỊNH NGÂN SÁCH VỐN TỐI ƯU

WACC và Tỷ
suất thu hồi
(%)
Cơ hội đầu tư, IOS • From a purely financial perspective, project D,
13
A = 13%
(Investment Opportunity Schedule)
whose rate of return is lower than the
B = 12,5%

C = 12%
company's average cost of capital, should
therefore be eliminated. The company should
12
WACC3 = 11,676%
Chi phí vốn biên, MCC WACC2 = 11%

11
(Marginal Cost of Capital)

D = 10,2%
only pursue projects A, B and C with a total
optimal capital budget to mobilize of 180
WACC1 = 10,083%
10
BP2 = 200 triệu USD
BP1 = 143 triệu USD
million USD in the next plan period.
50 100 150 180 200 250
Lượng vốn huy động (triệu
USD)
Ngân sách vốn tối ưu

(Optimal Capital Budget)

29 30