MGMT310_lecture21

# MGMT310_lecture21 - Last Lasttimewediscussed How can we...

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Last time we discussed… How can we come up with an occ for our project? Estimating cost of equity D E Use current capital structure Estimating cost of debt What is the WACC  D C E WACC R 1 t R D E D E Flotation costs: A E D f (E / V) f (D/ V) f Now let’s do some review questions! Use target capital structure Now let s do some review questions!

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Concept check Suppose a firm uses its WACC to evaluate all projects. Do you think it will underestimate or overestimate… 1. … the value of a high risk project? 2. … the value of a low risk project? Reminder : Don’t use a firm’s WACC as the occ for all potential projects. It’s only appropriate to use if the project in question is of average risk (compared to the firm’s current projects)
Example: cost of equity (#14.1) (using constant dividend growth approach) The Down and Out Co. just issued a dividend of \$2.40 per share on its common stock. The company is expected to i t i t t 5 5% th t it di id d maintain a constant 5.5% growth rate on its dividends indefinitely. If the stock sells for \$52 a share, what is the company’s cost of equity (R E )?

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Example: cost of equity (#14.2) (using SML approach) The Up and Coming Corporation’s common stock has a beta of 1.05. If the risk free rate is 5.3% and the expected return on
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