Study Guides (238,633)
Finance (313)
FIN 401 (71)
Yi Feng (1)
Midterm

# fin401 midterm crib sheet

2 Pages
2036 Views
Likes

School
Department
Finance
Course
FIN 401
Professor
Yi Feng
Semester
Winter

Description
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) o and ( )  Estimating “ ” – 4 Methods o Method 1: Compound Growth Rate – Use Compound Interest Function o Method 2: Historical Growth Rate – then o Method 3: Retention Ratio – o Method 4: Analysts’ Forecast Advantages Disadvantages  Easy to understand and use  Only applicable to companies paying dividends  Not applicable if dividends aren’t growing at constant rate  Sensitive to estimated growth rate change  Does not explicitly consider risk  Security Market Line (SML) / Capital Asset Price Model (CAPM) Approach o ( ) and ( ) ( ) Advantages Disadvantages  Adjusts for systematic risk  Have to estimate expected market risk premium which vary over time  Applicable to all companies if we can compute  Have to estimatewhich also varies over time  Relying on past to predict future which is not always reliable Solving for Cost of Debt (Bond Valuation)  Use Compound Interest Function: ( ) solve for I% Solving for Cost of Preferred Stock: Solving WACC: Accept project if IRR > WACC  Calculate Weights: and where  [ ( )] and ( ) Leasing/Buying – Minimizing cost by deciding to lease or buy an asset Solving for Net Advantage to Leasing (NAL): Same as NPV of the incremental cash flows  ⁄ o Calculating PV of After Tax Lease Payments (PVATL) – Use Compound Interest Function  ( ) ( ) solve for PV o Calculating PV of CCA Tax Shields (PVCCA) – PGRM CCA  ( ) o Calculating PV of Salvage – Use Compound Interest Function  ( ) solve for PV o If NAL > 0, the firm should Lease ; if NAL < 0, the firm should Buy Solving for Break-Even Lease  Set solve for PVATL o Solving for Max Lease Payment  ( ) solve for PMT 
More Less

Related notes for FIN 401
Me

OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.