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7. Review BUAD 306 Summer 2008

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Simple math formula Want to calculate an inFnite sum. .. X = y + y z +y z 2 + y z 3 +... = ? z X = y z +y z 2 + y z 3 +... X - z X = y So, X = y /(1- z ) X = 1st term /(1- multiplier )!
Value of an asset PV of all CF For in±nite CF, use the formula to get PV For ±nite CF, use two in±nite CF (two perpetuities) to get PV For mixed CF, split CF as you wish (e.g., in±nite CF part and ±nite CF part), then get each part’s PV and sum them up

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Discount rate Discount rate is (rate of) return to an investor (also called required rate of return) Discount rate is cost to a Frm Discount rate is determined in a market (a Frm takes it as given) Higher discount rate, more costly to Fnance
WACC (weighted average of cost of capital) Cost of capital : weighted average of cost of equity and cost of debt Average by weights = Leverage ratio (Lvg) WACC= r D × Lvg + r E × (1-Lvg)

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Capital structure Without
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