Primary and Secondary Markets
The sale of securities by the issuer to investors occurs in the primary markets, while the sale of securities between private investors occurs in the secondary markets. Primary Markets Initial public offerings describe the issuer’s first sale of a security…
Market Orders vs. Limit Orders
Market orders obtain the best price being offered in the market, so traders submitting marker orders are simply taking the market price. Limit orders will only buy below or sell above a given price. Suppose a trader’s limit order specifies…
Cost of Equity Capital
A company can increase its common equity either by reinvesting its earnings or issuing new stock. The cost of equity will, therefore, be the rate of return that is required by its shareholders. Three methods are used to estimate the…
Noncallable, Nonconvertible Preferred Stock
A preferred stock that does not give its holder the right to convert their preferred shares into a fixed number of common shares, usually after a predetermined date, is called a nonconvertible preferred stock. A noncallable, nonconvertible preferred stock is…
Cost of Debt Capital
The cost of debt is the cost of financing a debt whenever a company incurs a debt by either issuing a bond or taking a bank loan. Two methods for estimating the before-tax cost of debt are the yield-to-maturity approach…
The Marginal Cost of Capital
The cost of capital should ideally reflect the riskiness of the future cash flows of a project. For an average-risk project, the opportunity cost of capital is the same as the weighted average cost of capital (WACC) of the company….
Optimal Capital Budget
Marginal cost of capital (MCC) plays a very important role in capital budget decision-making. When used in conjunction with the investment opportunity schedule, an optimal capital budget may be determined. Optimal Investment Decision The MCC of a company tends to…
Target Capital Structure and WACC
The target capital structure of a company refers to the capital which the company is striving to obtain. In other words, target capital structure describes the mix of debt, preferred stock and common equity which is expected to optimize the…
How Taxes Affect the Cost of Capital
Taxes can have a significant impact on the weighted average cost of capital (WACC) of a company. However, taxes affect the cost of capital from different sources of capital in different ways. The Effect of Taxes on Debt In many…
Weighted Average Cost of Capital (WACC)
The concept of cost of capital informs the investment decisions that the management of a company makes. Similarly, it is useful in the valuation of a company by investors and analysts. A company that invests in a project which produces…
