FIN 401 Study Guide - Midterm Guide: Tax Bracket, Systematic Risk, Tax Shield
Document Summary
Weight average cost of capital (wacc) combination of cost of debt (bonds) and cost of equity (stocks) Solving for cost of equity (stock valuation) 2 methods. Dividend discount/growth model approach (ddm) and ( ) Estimating 4 methods: method 1: compound growth rate use compound interest function, method 2: historical growth rate , method 3: retention ratio , method 4: analysts" forecast then. Not applicable if dividends aren"t growing at constant rate. Security market line (sml) / capital asset price model (capm) approach: ( ) and ( ) Applicable to all companies if we can compute. Have to estimate expected market risk premium which vary over time. Have to estimate which also varies over time. Relying on past to predict future which is not always reliable. Use compound interest function: solve for i% Solving wacc: accept project if irr > wacc. Leasing/buying minimizing cost by deciding to lease or buy an asset.
