Mastering Financial Modelling in Microsoft Excel 3rd edn, 3rd Edition

13

Cost of capital

Introduction

Capital Asset Pricing Model

Dividend growth model

Cost of preference shares

Cost of debt

Weighted average cost of capital

Marginal WACC

Summary

INTRODUCTION

This chapter introduces the cost of capital for a corporation and models the theories of the Capital Asset Pricing Model, the perpetuity model and the weighted average cost of capital. The basic templates are in the MFM3_13_WACC file.

Corporate capital includes the following:

• bank financing – lines of credit, terms loans, asset-based loans and syndicated loans;
• off-balance sheet debt such as operating leases;
• bonds and international bonds;
• equity capital – ordinary and preferred shares and their permutations.

Each of the sources of capital carries a ...