BUS-F 355 Lecture Notes - Lecture 3: Equity Premium Puzzle, Risk-Free Interest Rate, Risk Premium

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24 Nov 2018
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Wacc: mix of specific companies cost of debt and cost of equity. Cost of debt * (1-marginal tax rate) * weight of debt + weight of equity * (capm (risk free rate + levered beta (expected market return - risk free rate) Risk free rate = 10 year treasury r_e = r_f = b_e (e[r_m]-r_f) Risk-free rate + beta * equity risk premium. Equity risk premium = market risk premium = expected return on market - risk free rate. Cost of debt: weighted average of interest rates on company"s outstanding debt. Capm: cost of equity or expected return of the company"s equity investors. 3-statement model used as the base of most financial models. Horizontal: multiple tabs that feed into a mostly linked is, bs, cf. Vertical: 3-4 tabs that have projections on is, bs, cf tabs. Blue: input, green: link from other tab, black: formula. Vf = sum of fcf_t/(1+wacc)^t + non-op assets.

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