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In finance, the cost of equity is the return (often expressed as a rate of return) a firm theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they undertake by investing their capital. Firms need to acquire capital from others to operate and grow.
For example, let Campany XYZ have Net Income = $2,000,000, there are 50,000 shares of common stock outstanding, and $1,000,000 of 10% bonds, convertible into 50,000 shares of common stock. Company A's tax rate is 25%.
WACC stands for weighted average cost of capital, which is the rate that a company pays to finance its assets. It is calculated by weighting the costs of different sources of capital, such as debt, equity and preferred stock, and taking into account tax effects.
Common stock is a form of corporate equity ownership, also known as ordinary share or voting share, that gives the stockholder the right to share in the profits and vote on corporate matters. Learn about the classification, ownership rights and risks of common stock in different markets and countries.
Learn how to calculate the cost of capital, the minimum return that investors expect for providing capital to a company, and how to use it to evaluate new projects. The cost of capital is the weighted average of the cost of debt and the cost of equity.
Learn how to value a stock based on its dividend payments and growth rate using the dividend discount model (DDM) formula. The DDM formula is derived from the present value of a perpetuity and the cost of equity capital.
Corporate finance is the area of finance that deals with the sources of funding, capital structure, and value maximization of corporations. Learn about its main sub-disciplines, such as capital budgeting and working capital management, and its historical development from the 15th century to the present.
Return on equity (ROE) is a measure of the profitability of a business in relation to its equity. It is calculated by dividing net income by average shareholders' equity and can be decomposed into three components: net margin, asset turnover, and accounting leverage.