COMMERCE 3FA3 Lecture Notes - Lecture 2: Dividend Yield, Capital Asset Pricing Model, Capital Gain

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 3FA3
• Professor: Trevor Chamberlain

Document Summary

Section 1: cost of capital: cost of common equity, capm (sml, com. 2fa3: demand for securities ( supply of funds) by shareholders: com 3fa3: supply of securities ( demand for funds) by firms i) Let"s review the shareholder"s view: receives an uncertain return comprising a dividend yield and a capital gain or loss, dividend yield (period 1) Di/p0: capital gain or loss (period 1) E(r1) = e( (= e (ri) from capm) ii) Firm"s view: shareholders return = firm"s cost (e(ri) = ki, dividned obvious cost, capital gain think of as cost in an opportunity sense. The proof of the pudding is in the eating. Therefore ke = e(ri) = 0. 06 + 1. 2 (0. 086) Apply to a capital budgeting project: assume three 1-period projects: K t e: assume dividends grow at a constant rate of g" (g =br; b = retention rate; r = rate of return) (1. P0 = a (1 + x + x2 + ),