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Yi Feng (1)

fin401 midterm crib sheet

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FIN 401
Yi Feng

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 
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