33:390:400 Study Guide - Comprehensive Final Exam Guide - Advertisement Film, Net Present Value, Retained Earnings
20 Nov 2018
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The discount rate of the project should be the expected return on a financial asset of comparable risk. Wacc can only be used when the project"s risk is equal to the risk of the company! Capital structure: the mixture of debt and equity for a firm. When a company has extra cash, it can either give it to shareholders through dividends or it can invest it in a new project. Cost of capital = required return = discount rate. 13. 2 estimating the cost of equity capital with the capm. E(r) of equity = (risk free rate) + [ beta * (e(r) of market risk free rate) ] Security market line (sml) graph: positive linear relationship. Estimating the cost of equity capital with the dividend growth model. Current price of a stock (p0) = (dvd1) / (r g) r = [ (dvd1) / (p0) ] + g. Riskier the project, the higher expected return.
