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20 Cards in this Set

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indicates how the market views the risk of assets
cost of capital
helps us determine our required return for capital budgeting projects
cost of capital
- same as appropriate discount rate
- based on risk of cash flows
required return
We need to earn at least the ____ _____ to compensate our investors for the financing they have provided
required return
return required by equity investors given the risk of cash flows
cost of equity
- only applicable to companies currently paying dividends
- only applicable to dividends growing at a constant rate
- does not explicitly consider risk
disadvantages of dividend growth model
- explicitly adjusts for systematic risk
- can apply to all companies as long as we can estimate beta
advantages of SML
- must estimate expected market risk
- must estimate beta (varies)
- not always reliable for future
disadvantages of SML
required return on company debt
cost of debt
We may use estimates of ____ rates based on the bond rating we expect when we issue ____ ____
current; new debt
generally pays a constant dividend every period
preferred stock
dividends are paid every period forever
preferred stock
The WACC is the ____ ____ on the firms' assets, based on the market's perception of the risk of those assets
required return
Interest expense ____ tax liability, which reduces ____ of ___
reduces; cost; debt
Using WACC is appropriate for projects that have the same ____ as the firm's current operations
risk
When looking at specific project, use the ____ ____ for that project instead of the ____ for the entire firm
required return; WACC
- find one or more companies that specialize
- compute beta
- average
- use beta and CAPM to find appropriate return for a project of that risk
pure play approach
- consider project risk relative to firm overall
- if project has more risk than firm, use discount rate > WACC
- if project has less risk than firm, use discount rate < WACC
- error rate lower than if not considering differential risk at all
subjective approach
required return depends on the risk, not how the money is raised
flotation costs
The cost of issuing ___ ___ should not just be ignored
new securities