Calculating the Weights of Debt and Equity Components

Once we have costs for each of the different components of financing, all we need are weights on each component to arrive at a cost of capital. In this section, we will consider the choices for weighting, the argument for using market value weights and whether the weights can change over time.

55 This rate was based upon a 10-year treasury bond rate. If the 5-year treasury bond rate had been substantially different, we would have recomputed a pre-tax cost of debt by adding the default spread to the 5-year rate.

56 The coupons are assumed to be annual. With semi-annual coupons, you would divide the coupon by 2 and apply a semi-annual rate to calculate the present value.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

Get My Free Ebook


Post a comment