Dykstra: Determining the Cost of Equity

On Monday, the markets were pumped up by details of the administration's plans to restore the banking sector. The NYSE jumped 7.3%, and the Dow Jones Industrial Average gained 6.8% to close near 7,776. Those big gains were all we needed to score a couple of wins for my deep-in-the-money options trading system.

Cisco(CSCO), which had been in play for 103 days, rang the bell, adding $3,900 to my win column. Hewlett-Packard(HPQ) also rounded home, winning $1,000 after just one week in play. These additions to my scorecard bring my record to 98-1. I'm getting closer than ever to an even 100 since TheStreet.com began distributing my Nails on the Numbers newsletter last spring.

My first win of $1,000 last year came April 2, on Sigma Designs(SIGM) on its third trading day out. And a successful closeout of my Garmin(GRMN) position came the following day - the same day that I picked it.

Not quite in the win column yet, Microsoft(MSFT), my March 13, 2009 pick, came within 5 cents of winning on Monday. Another up day in the stock will push it over the top.

Those wins are on top of this month's $1,000 win in Cameron International(CAM), bringing my total wins to date in March to $5,900.

Last week, I covered how to determine a company's cost of debt, which is one part of total capital. This week, I will look at how to calculate the cost of a firm's equity. When we combine them, we get the company's weighted average cost of capital. This number becomes useful when comparing it to return on capital -- to see if the company is using its assets to its best advantage.