25300 Lecture Notes - Lecture 8: Preferred Stock, Risk Premium, Dividend Yield
Document Summary
Contrast the various solutions to coping with forecast risk & Cost of capital describe sensitivity, scenario and simulation analysis. * forecast risk arises due to changes in npv variables such as prices, wages and discount rates. Sensitivity analysis: changes one variable to analyse npv. Objective = see if project is overly sensitive to one or more variables. Hard to do this in reality, therefore use scenario analysis. Scenario analysis: considers different scenarios such as: Simulation analysis: considers all possible combinations of variables. Monte carlo analysis = values are random: articulate theoretical differences between a sml and wacc approach to calculating a cost of capital. * the return that the investor receives is the cost for the company. Cost of capital must be a fair return that satisfies both shareholders and bond holders (linked to risk of project) *shareholders accept more risk than bond holders (e. g. 18% 10%) Cost of debt: required rate of return that a firms (cid:523)firm"s lenders(cid:524) debt.
