Midland_WACC

Midland_WACC - The Cost of Capital 1 Cost of Capital Firm...

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Unformatted text preview: The Cost of Capital 1 Cost of Capital Firm Value =PV(cash flows) Bondholders D r d Stockholders E r e d e portfolio r D E D r D E E r * * + + + = ) 1 ( * * * Tc r D E D r D E E WACC d e- + + + = 2 (Opportunity) cost of capital: The best available expected return offered in the market on an investment of comparable risk and terms to the cash flow being discounted. 3 Weighted Average Cost of Capital (WACC) Discount rate for projects = WACC (benchmark rate, hurdle rate) If NPV > 0, IRR> (opportunity) cost of capital (WACC) If NPV < 0, IRR< (opportunity) cost of capital (WACC) 4 Relationship between Risk and Expected Return (CAPM) Expected Return on the Market: Expected return on an individual security: Premium Risk Market + = F M r r ) ( F M i F i r r r r- + = Market Risk Premium This applies to individual securities held within well- diversified portfolios. 5 The Formula for Beta ) ( ) ( 2 , M M i i r r r Cov = Firms in the same industry will have similar beta values (if they have similar capital structure)....
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Midland_WACC - The Cost of Capital 1 Cost of Capital Firm...

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