Underwriting costs and the cost of capital
Hi guys,
I currently have to do a case study where I have to calculate the cost of capital.
The current average yield on the company's long-term debt is 9% and the cost of the long-term debt financing is 9.5% after allowing for a fee to the underwriter. Which of the two rates should I take for the cost of debt?
Additionally, for the cost of common stock there is a cost of $3 that needs to be paid to the underwriter when issuing new stock. Does this cost in terms of a percentage need to be added to the cost of equity that is calculated via the CAPM?
I've never seen the issue of underwriting costs been raised in a cost of capital calculation so I'm a little bit of confused.
Thanks in advance.
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