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13 Cards in this Set
- Front
- Back
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cost of equity
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the return that equity investors require on their investment in the firm
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cost of debt
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the return that the firms creditors demand on new borrowing
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weighted average cost of capital (WACC)
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The weighted average of the cost of equity and the aftertax cost of debt
(the overall return the firm must earn on its existing assets to maintain the value of the stock.) |
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pure play approach
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use of a WACC that is unique to a particular project, based on companies in similar lines of businesses
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risk free rate
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cost of capital for a risk-free investment
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cost of equity
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return that equity investors require on their investment in teh firm
-dividend growth model -sml |
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cost of debt
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return lender's require on the firm's debt
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combined market value of debt and equity
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V= E+ D
E= # of shares outstanding x price per share D= market price of a single bon x number of bonds outstanding 100% = E /V+ D/V |
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WACC
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weighted average of the cost of equity and the aftertax cost of debt
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factors that influence a company's composite wacc
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market conditions, firms capital structure and dividend policy, firm's investment policy riskier projects have a higher WACC
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pure play approach
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use of WACC that is unique to a particular project, based on companies in similar lines of business
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subjective approach
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assumes projects fall into risk classes
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why is the cost of retained earnings cheaper than the cost of issuing new common stock?
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when a company issues new common stock they also have to pay floatation coast to the underwriter
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