This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Dykstra: Calculating the Cost of Capital

Days like Monday -- when markets dropped nearly 4% -- don't bring wins in my deep-in-the-money options-trading system, which has a record of 99-1. But plunging prices help us fill our positions.

And that's exactly what happened yesterday. We landed our position in my pick Archer-Daniels-Midland (ADM - Get Report), which on Friday had looked possibly beyond our reach, at the price I specified.

My subscribers often take wins on open positions on the market's up days. Some big-movement days last week brought quick wins of $1,000 apiece on Microsoft (MSFT - Get Report) and Hewlett-Packard (HPQ - Get Report) -- proving that good tech companies at value prices can pay off for us.

We also scored a $3,900 payoff on our position in Cisco (CSCO - Get Report) on March 23, after 103 days in play.

Over recent weeks, we've laid the groundwork for comparing a company's return on capital to its cost. When picking stocks, I want to know if the company puts its capital to good use. I determine this by comparing its ROC to its cost of capital.

On March 17, I reviewed how to determine a company's cost of its debt -- one of two components in the cost of capital. We did that by seeing how much the company pays its bondholders. In this case, I determined that Halliburton (HAL - Get Report) had an estimated after-tax cost of 2.6% on its $2.6 billion in long-term debt at the end of 2008. I also showed that long-term debt made up 13.8% of total capital.

Our next step is to multiply these two percentages, giving us a weighted cost of debt of .00359. But that number is meaningful only in the context of Halliburton's total capital. Equity made up the other 86.2%.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
ADM $48.30 0.00%
CSCO $28.48 0.00%
HAL $47.85 0.00%
HPQ $33.41 0.00%
MSFT $43.10 0.45%

Markets

DOW 18,034.93 +208.63 1.17%
S&P 500 2,100.40 +19.22 0.92%
NASDAQ 4,994.6020 +62.7870 1.27%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs