- Retained earnings have an opportunity cost, which is equal to the cost of equity.
- The cost of retained earnings can thus be found in the same way as the cost of equity.
- It is a mistake to see retained earnings as a free source of finance.
- The cost of preference shares can be found by dividing the preference dividend by the ex div market price:
Kps = cost of preference shares
P0 = current ex div preference share price
Dp = preference dividend
- Like preference shares, bonds involve a constant annual payment in perpetuity.
Kd = cost of debt
I = annual interest payment
P0 = current ex interest market price
Note that interest is tax-deductible.
Calculating the cost of irredeemable bonds:
- 10% irredeemable bonds
- Ex interest market price: ￡72
- Corporation tax: 30%
- Kid (before tax) = 10/72 = 13.9%
- Kid (after tax) = 13.9 x (1 – 0.3) = 9.7%
- Redeemable bonds involve several fixed interest payments plus redemption value
I = interest payment
RV = redemption value or principal
Kd = cost of debt capital
n = number of years to maturity
CT = corporation tax rate
Essay writing service: 論文代寫