Capital and ROR - call the bank r D = r RF + DRP i + LP i +...

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Investors Required Rate of Return and Firm’s Cost of Capital Required Cost Rate of Return of Capital • common equity • common equity (CS and RE) (CS and RE) • preferred stock • preferred stock • debt • debt Risk Risk • for any financial security: Value = FCF 1 1 + r ( ) 1 + FCF 2 1 + r ( ) 2 + .......... + FCF n 1 + r ( ) n = FCF t 1 + r ( ) t t = 1 n value and rate of return (r) are inversely related Rate of Return Models/Perspectives (1) Debt (a) existing bond yield plus additional debt risk premium (b)
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Unformatted text preview: call the bank r D = r RF + DRP i + LP i + MRP t r D = risk-free rate plus various risk premiums (2) Preferred Stock r P = D P /P P P P = D P /r P (3) Common Equity (a) existing bond yield plus stock risk premium (b) CAPM: r S = r RF + (r M r RF ) (c) discounted cash flow model constant dividend growth: r s = D 1 /P + g P s = D 1 /(r s- g) supernormal growth model...
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This note was uploaded on 07/14/2010 for the course UGBA 103 taught by Professor Berk during the Summer '07 term at University of California, Berkeley.

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