KIN356ExamIII - Depreciation-not a real loss an on-paper...

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Bonds -Real rate + inflation premium = risk free rate -Risk free rate + risk premium = total interest rate If you pay off with stock -money is the stockholders’ If you pay off with debt -the money is yours Red herring -marketing -expected finances for a company Small companies (<1M in 12mo. Period) Triple A Bonds -least amt. of interest Junk bonds -highest interest rate Preferred stockholders—usually corp. -get assets @liquidation b4 common -no voice in company Debt -cheapest form of financing interest payments are tax deductible Kd = Y (1-T) -Kd= cost of debt, Y = yield interest rate given to you, T = tax rate -Kd always lesss than yield (cuz of tax break) Cost of new common stock -Kn = ((D1/(Po – F) + g)) Cost of preferred -Kp = Dp/(Pp – F) Cost of equity -Ke = (D1/Pn) +g - g = growth - Pn = price of new stock Optimal Capital Structure -minimize cost of capital Discount rate -(Kd/Kp/Ke/Kn)(weight) = discount rate
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Unformatted text preview: Depreciation-not a real loss an on-paper loss Problem set-earnings depreciation = appropriate calc. for taxes- Earnings after taxes + depreciation = cash flow Payback method-what ery1 wants but not that great-if I spent 10k today I should get it back in cashflows IRR-calculate interest rate with cashflows and inflows Yield on an investment use present value of $-PVannuity = A x PVifa-PVa/A = PVifa 1000/244 = 4.1-4.1 for 5 years = 7% (table D) If cashflows = uneven-average them Net Present Value (NPV)-present value of inflows minus present value of outflows-include discounts-take the sum and multiply it by the present value on chart = w/discount Mutually exclusive options-take the highest one Multiple options-exclude anything that doesnt meet your desire Risk-IRR &amp; PB method risk is assumed =-NPV: accounts for risk by increasing discount rate-negative result = not worth it...
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This note was uploaded on 06/15/2011 for the course KIN 356 taught by Professor Warner during the Fall '09 term at University of Texas at Austin.

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KIN356ExamIII - Depreciation-not a real loss an on-paper...

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