Chapter 3

COST OF
CAPITAL
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Tadele H. (PhD)
 Meaning of Cost of Capital
• Cost of capital is the return expected by the
providers of capital (i.e. shareholders, lenders
and the debt-holders) to the business as a
compensation for their contribution to the total
capital. When an entity (corporate or others)
procured finances from either sources as listed
above, it has to pay some additional amount of
money besides the principal amount.
• The additional money paid to these financiers
may be either one off payment (Lump sum) or
regular payment at specified intervals.
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Tadele H. (PhD)
 …Meaning of Cost of Capital
• This additional money paid is said to be the
cost of using the capital and it is called the cost
of capital.
• This cost of capital expressed in rate is used to
discount/ compound the cash flow or stream of
cash flows.
• Cost of capital is also known as ‘cut-off’ rate,
‘hurdle rate’, ‘minimum rate of return’ etc.

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Tadele H. (PhD)
 …Meaning of Cost of Capital
• Besides giving return to investors company will
also have to give commission, brokerage, fees etc.
to intermediaries for issue debentures which will
increase cost of capital.
• On the other hand payment of interest is a
deductible expense under the Income tax act
hence it will reduce cost of capital to the
company.
• Cost of any sources of finance is expressed in
terms of percent per annum.
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Tadele H. (PhD)
 …Meaning of Cost of Capital
• Cost is not the amount which the company plans to pay
or actually pays, it is rather the expectation of
stakeholders.
• Here Stakeholders include providers of capital
(shareholders, debenture holder, money lenders etc.),
intermediaries (brokers, underwriters, merchant bankers
etc.), and Government (for taxes).
• For example if the company issues 9% coupon
debentures but expectation of investors is 10% then
investors will subscribe it at discount and not at par.
Hence cost to the company will not be 9%, rather it will
be 10%.
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Tadele H. (PhD)
 …Meaning of Cost of Capital
• Always think of it as the opportunity cost of
capital. It is the rate of return your investors
could expect to receive by investing in similar
projects elsewhere.
• Opportunity Cost is determined by the prevailing
required rates of return for projects of your type.
• Therefore, it is driven by the demand and supply
for capital in the economy—the expected rate of
return that your investors demand in order to give
you money willingly
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Tadele H. (PhD)
 Significance of Cost of capital
• The cost of capital is very important in financial
management and plays a crucial role in the
following areas:
• i) Capital budgeting decisions: The cost of capital is
used for discounting cash flows under Net
Present Value method for investment proposals. So, it is
very useful in capital budgeting decisions.
ii) Capital structure decisions: An optimal capital
structure is that structure at which the value of
the firm is maximum and cost of capital is the lowest.
So, cost of capital is crucial in designing
optimal capital structure.
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Tadele H. (PhD)
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 …Significance of Cost of capital
• iii) Evaluation of financial performance: Cost
of capital is used to evaluate the financial
performance of top management. The actual
profitability is compared to the expected and
actual cost of capital of funds and if profit is
greater than the cost of capital the performance
may be said to be satisfactory.
• iv) Other financial decisions: Cost of capital is
also useful in making such other financial
decisions as dividend policy, capitalization of
profits, making the rights issue, etc.

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Tadele H. (PhD)
Project’s cost of capital Vs Firm’s cost of
capital
• The project’s cost of capital is the minimum
required rate of return on funds committed to
the project, which depends on the riskiness of
its cash flows.
• The firm’s cost of capital will be the overall,
or average, required rate of return on the
aggregate of investment projects

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Tadele H. (PhD)
 Classification of Cost of Capital:
Cost of capital can be classified as follows:
i) Historical Cost and future Cost: Historical costs are
book costs relating to the past (irrelevant for decision),
while future costs are estimated costs act as guide for
estimation of future costs.
ii) Specific Costs and Composite Costs: Specific accost
is the cost if a specific source of capital (Like cost of
debt, coat of equity, cost of retained earning etc), while
composite cost is combined cost of various sources of
capital. Composite cost, also known as the weighted
average cost of capital, should be considered in capital
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and capital budgeting decisions.
Tadele H. (PhD)
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 …Classification of Cost of
Capital:
• iii) Explicit and Implicit Cost: Explicit cost of
any source of finance is the discount rate which
equates the present value of cash inflows with the
present value of cash out flows. It is the internal
rate of return and is calculated with the following
formula;

Io= Net cash inflow received at zero of time

C = Cash outflows in the period concerned
K = Explicit cost of capital
n = Duration of time period
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Tadele H. (PhD)
 …Classification of Cost of
Capital:
• Implicit cost also known as the opportunity cost is
the of the opportunity foregone in order to take up a
particular project.
• For example, the implicit cast of retained earnings is
the rate of return available to shareholders by
investing the funds elsewhere.
• iv) Average Cost and Marginal Cost: An average
cost is the combined cost or weighted average cost
of various sources of capital. Marginal cost of
refers to the average cost of capital of new or
additional funds required by a firm. It is the
marginal cost which should be taken into
consideration in investment decisions.
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Tadele H. (PhD)
 …Computation of Cost of
Capital:
• Computation of cost capital of a firm involves
the following steps:
• i) Computation of cost of specific sources of
a capital, viz., debt, preference capital, equity
and retained earnings, and
• ii) Computation of weighted average cost of
capital (WAAC).

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Tadele H. (PhD)
 Computation of Cost of Capital-
Cost of Debt
• Cost of Debt (kd)
• Debt may be perpetual or redeemable debt.
• Moreover, it may be issued at par, at premium
or discount. The computation of cost debt in
each is explained below.

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Debt
Example 1 Cost of debt (at par)
• A Ltd., issues Br. 50,000 debentures of 8% at par. The tax
rate is 50%. Determine the after tax cost of debt (Kd).
 I 
kd before tax  
 NP 
 I 
kd after tax tax    * (1  T )
 NP 

I= Face value * coupon rate = 50000*8%= 4000

• Kd before tax= 4000/50000 = 8%
• Kd after tax= (4000/50000)(1-0.5) =4%
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Tadele H. (PhD)
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 …Computation of Cost of Capital-
Cost of Debt
A. Cost of Perpetual / irredeemable debt:
Example 2 Cost of debt (at premium)
A hypothetic company issued Br. 200,000, 9%
debentures at a premium of 10%. Floatation
costs are 2% .The tax rate is 40%.  I 
Compute the after tax cost of debt. kd   NP 

Where: K d = Cost of debt before tax =I/NP

I= interest; NP = net proceeds
kd(after-tax) = I/NP(1-t) Where
t = tax rate
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Debt
• I= Face value* coupon Rate
=200,000*9%= 18000
Net Proceed (NP)=Face Value +Premium-floatation cost
Br. 200,000 + (200,000*10%) – (2%x2,20,000)=
Br215,600
 I   18000 
kd   kd     8.34%
 NP 
  215600 

kd after tax  kd (1  t   8.34(1  .)  5.004%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Debt
Example: 3 Cost of debt (at discount)
• i) X Ltd has Br. 100,000, 10% debentures issued
at 5% discount. The tax rate is 40%. Compute the
after tax cost of debt.
• Net Proceed (NP)=Face Value -discount-
floatation cost
• I= 100000*10%= Br.10000
• NP= (100,000*10%)- (100000*5%)
• = 95,000
• Kd after tax= (10000/95000)(1-0.4)=6.32%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Debt
• Example 5 Redeemable debt
• The debt repayable after a certain period is known as
redeemable debt. Its cost is computed by using the
following formula:

• Where
• I = interest; P = proceeds at par; NP = net proceeds;
n= No. of yearsFMin which debt is to be redeemed
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Debt
A company issues Br. 100,000 10% redeemable
debentures at a discount of 5%. The floatation
costs amount to Br. 3,000.
The debentures are redeemable after 5 years.
Compute before - tax and after - tax Cost of
debt. The tax rate is 50%.

Kd after tax= 0.1208*(1-0.5)= 6.04%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Debt
• Note
• NP = 100000-(100000*.05)-(100000*.03)
• =100,000 - 5,000 - 3,000 = 92,000
• What if the Tax rate is 40%?

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
• In case of preference shares dividends are payable
at a fixed rate.
• However, the dividends are not allowed to be
deducted for computation of tax. So, no
adjustment for tax is required unlike debentures.
• preference shares may be perpetual or
redeemable.
• Further, they may be issued at par, premium or
discount.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
Example 6 Perpetual preference Capital (issued
at par)
• Kp = D/P Where
– Kp= Cost of preference capital
– D = Annual preference dividend
– P = Proceeds at par value

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
• A company issues lO,OOO, lO% preference
shares of Br. 1O each. Cost of issue is Br. 2 per
a share.
• Calculate cost of preference capital, if these
shares are issued
– (a) at par,
– (b) at lO% premium, and
– (c) at 5% discount.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
Solution:
A. When the shares are issued at par
Kp = D/P
Where Kp= cost of preferred share
D= Annual dividend
Dividend per share= Par value of the share x rate= Br
10x10%=Birr 1 per share
Therefore D= Dividend per share x Number of shares
D= Birr 1 x 10,000= Br. 10,000
OR…………
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
First compute the Face Value
Face value = No. of shares *Par value
Face value (proceed)= 10,000*Br10
= Br.100,000
Then compute the dividend i.e
D= par value x rate= (100,000*10%)
D = Br. 10,000

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
Then compute the Net Proceed (NP)
• NP= Face value- cost of Issue
• NP=100,000-(10,000*Br 2)
• NP= Br. 80,000
Therefore Kp= D/NP
=10000/80,000
Kp= 12.5%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
B. When issued at lO% premium:
Premium= Br 100,000*0.1= 10,000
NP= Face value + premium-cost of Issue
NP= 100,000+10,000-20,000= Br 90,000
Or (100,000*1.1)-20,0000
NP= Br 90,000
Kp= D/NP= 10,000/90,000= 11.11%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
C. When issued at 5% discount:
Discount= Br 100,000*0.05= 5,000
NP= Face value - Discount-cost of Issue
NP= 100,000-5,000-20,000=
Or (100,000x(1-.05))-20,000
NP= Br 75,000
Kp= D/NP= 10,000/75,000= 13.33%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
Redeemable preference shares:
• Redeemable Preferences shares are those types of
preferred shares issued to shareholders which
have a callable option embedded, meaning they
can be redeemed later by the company.
• For these types of preferred stocks, the company
has the option to redeem them later. They do
not have a maturity date and are retired by the
company.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
• It is calculated with the following formula:

• Where
• KD = Cost of preference capital
D = Annual preference dividend
MV = Maturity value of preference shares
NP = Net proceeds of preference shares

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
Example: 7 Cost of Redeemable preference
shares:
A company issues 100,000, 10% preference
shares of Rs. 10 each.
Calculate the cost of preference capital if it is
redeemable
a) at par after 10 years.
b) at 5% premium
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
Solution:
a) Cost of preference capital, if redeemable at
par par:

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Preference share
b) Cost of Capital -If redeemable at a
premium of 5%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
• In the context of the dividend discount
valuation model, the cost of equity capital, ke,
can be thought of as the discount rate that
equates the present value of all expected future
dividends per share, as perceived by investors
at the margin, with the current market price per
share.

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Cost of Equity capital/Common stock
• Cost of Equity is the expected rate of return by
the equity /common stock holders.
• Some argue that, as there is no legal bondage
for payment, equity capital does not involve
any cost. But it is not correct. Equity
shareholders normally expect some dividend
from the company while making investment in
shares. Thus, the rate of return expected by
them becomes the cost of equity.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
• Conceptually, cost of equity share capital may be
defined as the minimum rate of return that a firm
must earn on the equity part of total investment in
a project in order to leave unchanged the market
price of such shares.
• For the determination of cost equity capital it may
be divided into two categories:
• i) External equity or new issue of equity shares.
• ii) Retained earnings (Internal Equity).
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
i) Cost of External equity or new issue of equity shares. -
Dividend Yield / Dividend Price Approach
According to this approach, the cost of equity will
be that rate of expected dividends which will maintain the
present market price of equity shares. It is calculated with the
following formula:
Ke = D/NP (for new equity shares) Or
Ke = D/MP (for existing shares)
Where, Ke = Cost of equity
D = Expected dividend per share
NP = Net proceeds per share
Mp = Market price per share
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Example7 Cost of Equity-Zero Dividend growth
rate (Fixed Dividend)
• A company issues, 10,000 equity shares of Br.
100 each at a premium of 10%. The company has
been paying 20% dividend to equity shareholders
for the past five years and expected to maintain
the same in the future also.
• Compute cost of equity capital.
• Will it make any difference if the market price of
equity share is Br. 150 ?
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Soln
Face Value of the shares 10000 x br. 100
= Br. 1,000,000
NP= 1,000,000+(1000,000x10%)
NP= 1,100,000
Annual Dividend (D)= Br.1,000,000x20%=200,000
Therefore: Ke = D/NP
Kp=200,000/1,100,000
Ke=18.18%
Note that computation of Ke and Kp in this case is the
same as the dividend in both
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Chap 3 COST i s fixed
OF CAP ITAL.-
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
• If the market price per share =Br.150
• NP= No. of shares x market price per share
• NP=10000*150
• NP=1,500,000
Kp=D/NP
Kp=200,000/1,500,000
Kp=13.33 %

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Dividend yield plus Growth in dividend methods
According to this method, the cost of equity is determined
on the basis of the expected dividend rate plus the rate of
growth in dividend.
Assume dividends are expected to grow at a constant
rate.
Ke = (D1 /NP) +g (for new equity issue)
Where,
Ke= Cost of equity
D1 = Expected dividend per share at the end of the year.
[D1 = Do(1+g)]… D2=D1(1+g)or Do(1+g)2…..
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
…Therefore Dn= Do(1+g)n
Np = net proceeds per share
g = growth rate in dividend for existing share
which is calculated as:
g=(D1 / MP) + g
Where,
MP = Market Price per share.

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Example 8 Cost of Equity- Constant Dividend growth
rate
• ABC Ltd plans to issue 100,000 new equity shares of Br.
1O each at par. The floatation costs are expected to be
5% of the share price. The company pays a dividend of
Br 1. per share (D1) and the growth rate in dividends is
expected to be 5%. Compute the cost of new issue of
shares.
• If the current market price of the share is Br. 15,
calculate
A. the cost of the existing equity share capital.
B. the cost of theFMnew
for MBA- Chap 3 COST OF CAPITAL.-
equity share capital.
Tadele H. (PhD)
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 …Computation of Cost of Capital-
Cost of Equity/Common Stock
• Soln
A. Cost of new equity shares

• NP = price per share – floatation cost

= Br10- (0.05x10)
=Br10-0.5= Br9.50
• Ke = (1 / (10-0.5-) + 0.05 =
• Ke= (1/9.5)+0.051
Ke= 5.53%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
B. Cost of existing equity share:
ke = (D / MP) + g
Ke= (1/ Br. 15 )+0.05
• = 0.11667 or 11.67%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Earnings Yield Method: According to this approach, the
cost of equity is the discount rate that capitalizes a
stream of future earnings to evaluate the shareholdings.
• It is calculated by taking earnings per
share (EPS) into consideration. It is calculated as:

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Example 9 Cost of Equity Using Earnings Yield
Method:
A company is planning for an expenditure of Br,
12,000,000 for its expansion program. No. of existing
equity shares are 2,000,000 and the market value of
equity share is Br. 60. It has net earnings of Br.
18,000,000.
Compute
A. the cost of existing equity share capital
B. the cost of new equity capital assuming that new
shares will be issued at a price of Br. 52 per share and
the costs of new issue will be Br, 2 per share.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
A. Cost of existing equity = Ke=EPS/MP

First calculate EPS=Earning/Number of shares

• EPS=18000000/2000000=Br 9
• Therefore Ke=EPS/MP
• Ke= 9/60= 15%
B. Cost of new equity capital :
Ke= EPS/NP=
NP= Price per share - cost of issue
NP= 52-2= 50
Therefore Ke = EPS/NP = 9/(52-2) = 18%

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Capital-asset pricing model (CAPM)
• Is a model that describes the relationship
between risk and expected (required) return;
• In this model, a security’s expected (required)
return is the risk-free rate plus a premium
based on the systematic risk of the security.

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Assumptions of the Model.
• First, we assume that capital marketsare efficient in that
investors are well informed,
• Transactions costs are low,
• There are negligible restrictions on investment,
• No investor is large enough to affect the market price of
a stock.
• Investors are in general agreement about the likely
performance of individual securities and that their
expectations are based on a common holding period,
say one year.

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
• the CAPM implies the following required rate
of return, (Rj), for a share of common stock:
Rj= Rf + (Rm - R f)βj where
– Rf is the risk-free rate,
– Rm is the expected return for the market portfolio,
and
– βj is the beta coefficient for stock j

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
• The risk-return relationship is described by the
above equation is known as the security market
line (SML). It implies that in market equilibrium,
security prices will be such that there is a linear
trade-off between the required rate of return and
systematic risk, as measured by beta.
• Beta is a measure of the responsiveness of the
excess returns for a security (in excess
of the risk-free rate) to those of the market, using
some broad-based index, as a surrogate for the
market portfolio.
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Tadele H. (PhD)
…Computation of Cost of Capital-
Cost of Equity/Common Stock

The Security Market Line (SML)

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Equity/Common Stock
Example 12 Cost of Equity using CAPM
Assume that a rate of return of about 13 % on
stocks in general is expected to prevail and that
a risk-free rate of 8% is expected.
Using the previous Equation, the cost of equity
capital would be
Rj= Rf + (Rm - R f)βj
Rj= 0.08 + (0.13 - 0.08)x1.20 = 14%
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Retained Earnings
Cost of Retained Earnings (Kr )
• Retained earnings refer to undistributed profits of a firm.
Out of the total, earnings, firms generally distribute only a
part of them in the form of dividends and the rest will be
retained within the firms.
• Since no dividend is required to be paid on retained
earnings, some people feel that 'retained earnings carry no
cost‘. But this approach is not appropriate.
• Retained earnings has the opportunity cost of dividends
foregone by the investors. The rate of return that could
have been earned by investors by investing dividends in
alternative investments becomes cost of retained earnings.
• Hence. shareholders expect a return on retained earnings at
least equal to cost of equity.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Cost of Retained Earnings
• Two adjustments should be made to cost of retained
earnings from cost of equity
A. Income-tax adjustment as the shareholders are to pay
some income tax out of dividends, and
B. Adjustment for brokerage cost as the shareholders
should incur some brokerage cost while investing
dividend income.
Therefore, after these adjustments, cost of retained earnings
is calculated as :
Kr = Ke (l-t) (l-b)
• Where, K, = cost of retained earnings
• K, = cost of equity; t = rate of tax
• b = cost of purchasing new
FM for MBA- Chapsecurities
3 COST OF CAPITAL.- or brokerage cost.
Tadele H. (PhD)
57
 …Computation of Cost of Capital-
Cost of Retained Earnings
• Example 10: Cost of Retained earnings
• A firm's cost of equity (Ke) is 18%. the average
income tax rate of shareholders is 30% and
brokerage cost of 2% is expected to be incurred
while investing their dividends in alternative
securities. Compute the cost of retained earnings.
Solution:
• Cost of retained earnings =Kr = Ke (1-t) (1-b)
• = 18 (1-.30) 1-.02) = 18 x.7 x .98
• = 12.35%
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)
The WACC has a very straight forward interpretation. It
is the overall return the firm must earn on its
existing assets to maintain the value of its stock.
It is also the required return on any investments by the
firm that have essentially the same risks as existing
operations.
So, if we were evaluating the cash flows from a
proposed expansion of our existing operations, this is
the discount rate we would use.
It is the average of the costs of various sources of financing.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Weighted Average Cost of Capital
• It is also known as composite or overall or
average cost of capital.
• After computing the cost of individual sources
of finance, the weighted average cost of capital
is calculated by putting weights in the
proportion of the various sources of funds to
the total.

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Tadele H. (PhD)
 …Computation of Cost of Capital-
Weighted Average Cost of Capital
• Weighted average cost of capital is computed by
using either
i) Market value weights or
ii) Book Value weights.
• Market value weights suffer from the following
limitations:
– i) market values are subject to frequent fluctuations
– Ii) equity capital gets more importance, with the use of
market value weights
• However book values are readily available
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)
• Weighted Average Cost of Capital (WACC) is
computed using the following formula

• Where,
 Kw = weighted average cost of capital
 x = cost of specific source of finance
 w = weights (proportions of specific sources of
finance in the total)
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)
Steps in the computing of weighted average cost of
capital:
i) Compute the cost of each source of finance
ii) Add the costs of each sources of finance
iii) Determine the weight of each source of finance
iv) multiply the cost of each source with the
corresponding weight
v) add all these weighted costs so that weighted
average cost of capital is obtained.
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Tadele H. (PhD)
 …Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)
• Example11: Wighted Average Cost of Capital
(WACC)
From the following capital structure and after - tax cost
for different sources of funds,
compute the weighted average cost of capital of a firm

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64
Tadele H. (PhD)
…Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)

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65
Tadele H. (PhD)
 …Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)
Example 12: Determine the weighted average cost of
capital using i) book value weights, ii)market value
weights.

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Tadele H. (PhD)
…Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)

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67
Tadele H. (PhD)
…Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)

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Tadele H. (PhD)
…Computation of Cost of Capital-
Weighted Average Cost of Capital
(Ko)

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Tadele H. (PhD)
 End of
Chapter 3
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Tadele H. (PhD)