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Unformatted text preview: Interest Rate on New Debt Tax Savings = R d (1T) Component Cost of Preferred Stock = r p = (D p )/(P p ) Required Rate of Return = Expected Rate of Return r S = r RF + RP = (D 1 )/(P ) + g = S The CAPM Approach = Step 1: Estimate the riskfree rate, r RF Step 2: Estimate the stocks beta coefficient, b i Step 3: Estimate the expected market risk premium Step 4: Substitute the preceding values in the CAPM equation to estimate the required rate of return on the stock in question: r S = r RF + b i (r M r RF ) BondYieldplusRiskPremium Approach = r S = bond yield + risk premium DividendYieldplusGrowthRate OR Discounted Cash Flow (DCF) Approach = P = (D 1 ) / (r S g) Cost of Equity from New Stock = r e = [(D 1 )/(P (1F)] + g EPS 1 = EPS (1+g)...
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This note was uploaded on 06/12/2011 for the course FINC 302 taught by Professor Lawrence during the Spring '11 term at Nicholls State.
 Spring '11
 lawrence
 Debt, Interest, Interest Rate

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