COMM 308 Chapter Notes - Chapter 20: Risk Premium, Market Risk, Capital Asset Pricing Model

• School: Concordia University
• Department: Commerce
• Course: COMM 308
• Professor: Raad Jassim

Document Summary

Determining the weighted average cost of capital (wacc) Total enterprise value (v) - overall market value of invested capital/firm. = all interest-bearing debt + equity ( d + s ) Ebit (1 t) = roi x ic. = k e + k d (1 t) In above equation, average required rate of return is a weighted average cost of capital (wacc or cost of capital) - estimate of firm"s average cost for of financing. Above equation is incomplete when firm uses preferred share financing, k d (1 t) replaced with k i to denote after-tax cost of debt. Wacc = k e + k p ( P = market value of firm"s preferred shares. V = value of the firm ( s + p + d ) Estimating market value of firm"s common equity ( s ) is straightforward whenever firm has shares that are traded publicly.