Upload
kevin-mcwilliams
View
34
Download
0
Embed Size (px)
Citation preview
The Cost of CapitalThe Right Side of the Balance SheetWhat is going to cost you to to fund your business
Debt vs Equity
Debt – typically less expensive
Driven by the interest rate environment The specific company’s perceived riskiness to
lendersTax deductible
EquityMore difficult to quantify Investors perceived potential return vs the
perceived risk
DebtCost of Debt= Rate*( 1- tax rate)
Company's that issue debt /bonds need to obtain a credit rating Standard & Poor’s, Moody’s, Fitch, others
Current Rateshttp://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html
For your projects assume that you are a AA company and your cost to borrow starts at 3.26%
It will then be determined by the market Your company's perceived riskiness vs other
companies Debt to Equity Ratio Cashflow, Profitability etc.
The Cost of EquityThe return your company needs to provide to attract equity investors.
A formula: Cost of Equity = rfr + beta * ( emr – rfr)
The risk free rate + the company’s beta x (the expect market rate – the risk free rate
1. Risk free rate : 10 year US Treasury = 1.6 %
2. Beta of 1.1 for a start up / more volatile
3. The market rate=- S&P 500 index ytd = 6%
1.6% + 1.1 (6%-1.6%) = 6.44%
For your projects assume this as a start
Business Plans TodayContinue building your
organizational plan Build out your Beginning
Balance Sheet For groups decide who will do
what
Balance Sheet1. Make a complete list of the stuff that you need to
run your business
2. Start with an assumption that you need 10% to 20% $ of your total assets as cash
Liabilities and Equity
3. Assume that you have 25% of your total assets to put into your company
4. You need to raise the other 75% though either debt or equity