Question

Define each of the following terms:

a. Weighted average cost of capital, WACC; after-tax cost of debt, rd 1 T ; after-tax
cost of short-term debt, rstd 1 T
b. Cost of preferred stock, rps; cost of common equity (or cost of common stock), rs
c. Target capital structure
d. Flotation cost, F; cost of new external common equity, re

Answer 1

As per policy, we cannot able to post solution more than one question.

Weighted average cost of capital is stand for WACC.

The WACC is minimum required rate of return; it is also called as cut of rate for company.

Cost of all sources of capital including common stock, preferred stock, bonds or any other debts in long term nature are proportionately weighted for calculation of Weighted average cost of capital.

Cost of debt is interest. For the purpose of tax, interest that accrues on debt can be tax allowable for deduction.

Actual cost of debt security is less than the interest rate on security.

In short words, cost of debt considered after tax adjustment.

After-tax cost of short-term debt

Similarly above concept, short term debts are considered after tax adjustment. But short term debt not considered for calculation of Weighted average cost of capital