COMMERCE 3FA3 Study Guide - Final Guide: Efficient-Market Hypothesis, Capital Expenditure, Nick Leeson

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 3FA3
• Professor: Anwar Husain

Document Summary

Market risk premium = 9% (cid:1844)(cid:3032)=(cid:882). (cid:882)(cid:887)+(cid:883). (cid:883)(cid:887)[(cid:882). (cid:882)(cid:891)] = 15. 35% Weighted average cost of capital (wacc): weighted average of cost of debt and equity. Where: e = equity, p = preferred shares, d = debt, v = value (sum of e, p, d), rf = cost of equity, rp = cost of preferred, rd = cost of debt, tc = tax rate. Ex: bond with face value outstanding of , current quote is 1. 1, coupon rate is 9%, yield is 7. 854%, tax rate is 40%. Info from cost of equity example holds true. (cid:1849)(cid:1827)(cid:1829)(cid:1829)=(cid:1831)(cid:1848)(cid:4666)(cid:1844)(cid:3032)(cid:4667)+(cid:1842)(cid:1848)((cid:1844)(cid:3043))+(cid:1830)(cid:1848)(cid:4666)(cid:1844)(cid:3005)(cid:4667)(cid:4666)(cid:883) (cid:1846)(cid:3004)(cid:4667) (cid:882)(cid:886)+(cid:883). (cid:883)(cid:1848)(cid:4666)(cid:882)(cid:4667)+(cid:883)(cid:1828) (cid:883). (cid:883) (cid:1849)(cid:1827)(cid:1829)(cid:1829)=(cid:4666)(cid:887)(cid:882)(cid:1839) (cid:890)(cid:882)(cid:4667) (cid:4666)(cid:883)(cid:887). (cid:885)(cid:887)%(cid:4667)+ (cid:886)+(cid:883). (cid:883) The discount rate for npv calculations is the minimum rate of return. 1. pure play approach: find company in market place that operates in similar industry (similar company and use their wacc) 2. subjective approach: use estimate and adjust for risk. Above average risk wacc is added to that percentage (estimate what you will add to.