April 2014
Intermediate to advanced
1344 pages
44h 24m
English
book
Cost of Capital: Applications and Examples, + Website, 5th Edition
by Shannon P. Pratt, Roger J. Grabowski, Richard Brealey
Content preview from Cost of Capital: Applications and Examples, + Website, 5th Edition
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CHAPTER 20
Other Components of a Business's Capital Structure
Estimating Current Market Yields on Debt
Convertible Debt and Convertible Preferred Equity Capital
INTRODUCTION
The capital structure of many businesses includes two or more components, each of which has its own cost of capital. Companies whose capital structure includes many components may be said to have a complex capital structure. The major components commonly comprising a business's capital structure are:
- Debt capital
- Preferred equity capital
- Common equity capital
Similarly, a project being considered in a capital budgeting decision may be financed by multiple components of capital.
In a complex capital structure, each of these general components may have subcomponents, and each subcomponent may have a different cost of capital. In addition, there may be hybrid or special securities, such as convertible debt or preferred stock, warrants, options, or leases.
Ultimately, a business's or project's overall cost of capital is a result of the blending of the individual costs of each of these components. This chapter briefly discusses each of the capital structure components, and Chapter 22 shows the process of blending them into a business's ...
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