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How to find the cost of debt, cost of preferred stock, cost of common equity, capital...

How to find the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital for a publicly traded company like Costco or Amazon.

Solutions

Expert Solution

For any publicly traded company, download the annual report of that company

A capital structure usually is the percentage of equity both common and preferred and debt the company has. The capital structure lets us analyze how much leverage can a corporation use.

For a cost of debt, check the credit rating of the publicly traded company, take the company spread accordingly and add it to US treasury yield. Therefore for a company like Amazon, the cost of debt can be close to 4.5% respectively.

cost of debt=Rf + Company default Spread+Country Default Spread or method 2 is interest/debt.

To calculate cost of common equity and preferred stock, use CAPM model

formula for capm is

Cost of equity=Rf + ? * (Mature Market premium + Country Risk Premium), as for companies of United states there won't be a country risk premium.

Beta can be calculated by using a variance-covariance method or levered-unlevered beta method or can simply take from Bloomberg.

Capital structure is weights of debt to equity or D/E ratio of a firm, this can be calculated directly from annual report.

After tax Cost of Capital,WACC = Wd*Rd*(1-Tc)+ We*Re

where

Wd=weight of debt

Rd=cost of debt

Tc=Tax bracket

We=weight of equity

Re=Cost of equity.

jeff jeffy answered 2 years ago
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