9. Example: Cost of Capital 10.41% K a WACC 7.2% 60% 12% K e Equity (R.E) 1.09% 10% 10.94% K P Preferred Stock 2.12% 30% 7.05% K d Debt Weighted cost Weights Cost (After tax) (3) (2) (1)
10. Minimum WACC 40% Cost of equity WACC Cost of debt % Debt ratio % Minimum WACC: lowest cost of capital
11. Example: Projects and Rates of Return $ 95 Total 10 7% H 15 8.6% G 20 9.5% F 11 10.65% E 20 11.8% D 4 13.5% C 5 14% B $10 16% A Cost (Millions) Expected Return Projects
12. Cost of Capital and Investment Projects: Stable WACC % Amount of Capital WACC A B C D E F G H
13. Cost of Capital and Investment Projects: Increasing WACC % Amount of Capital WACC A B C D E F G H