FINC
II.%20Wacc%20and%20CAPM

II.%20Wacc%20and%20CAPM - II WACC and CAPM We review basic...

Info icon This preview shows pages 1–10. Sign up to view the full content.

1 II. WACC and CAPM We review basic valuation inputs. A. The cost of capital: r A B. FCFF C. Using r A to find the optimal capital structure D. More general cost of capital E. Using the CAPM to account for risk F. Measuring Beta; b , the risk free interest rate; r F , the equity market rate; r M G. Divisional betas
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

2 A. The cost of capi tal, r A The cost of capital is the minimum rate of return that must be earned on the new project so providers of capital, equity and debt, just earn their respective required rates of return. FCFF is the free cash flow to the firm . A B S B S r r (1 T) r V V ° ± ° ± = - + ² ³ ² ³ L l L l
Image of page 2
3 The balance sheet ________ Firm value is the sum of V B market value of debt and S market value of equity V = B + S Each having a required rate of return r A = the firm s required rate of return r B = bondholder s required rate of return r S = stockholder s required rate of return
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.