This preview shows pages 1–4. Sign up to view the full content.
Chapter 12 and 13 Notes, Questions, and Answers
1
Chapter 12
•
Debt
•
Preferred equity
•
Common equity
1.1
Cost of debt
•
Yield to Maturity Approach
•
Debtrating Approach
1.2
Preferred Stock
r
p
=
D
P
(1)
Where
•
P is the price of the preferred stock
•
D is the dividend per share
•
r
p
is the cost of preferred stock
1.3
Cost of Equity
•
Capital Asset Pricing Model (CAPM)
•
Dividend Discount Model
•
Bond Yield plus risk premium method
1
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document 1.3.1
CAPM
E
(
R
i
) =
R
f
+
B
i
[
E
(
R
M
)
R
f
]
(2)
where
•
Bi = return sensitivity of stock I to changes in the market return.
•
E(RM) = expected return on the market.
•
E(RM)Rf = expected market risk premium.
1.3.2
DDM
P
=
D
1
re

g
(3)
•
P0 = current market value of the equity market index
•
D1=dividends expected next period
•
Re=required return on the market
•
g=growth rate of dividends
1.3.3
Estimating Dividend Growth Rate
G
= (1

D
EPS
)
xROE
(4)
where
•
D/EPS
= assumed stable dividend payout ratio
•
ROE = historical return on equity
1.3.4
Bond Yield Approach
r
e
=
r
d
+
riskpremium
2
1.3.5
Pure Play Method
1. Select a comparable company with similar business risk.
2. Estimate the comparable beta.
3. Unlever the comparable beta.
4. Lever the beta for the projects ﬁnancial risk.
2
Chapter 13
Three steps to calculate the cost of capital
1. Calculate the value of each security as a proportion of the ﬁrms market value.
2. Determine the required rate of return on each security.
3. Calculate a weighted average after tax return on the debt and the return on the equity.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 10/25/2011 for the course FIN 351 taught by Professor Li during the Spring '09 term at S.F. State.
 Spring '09
 LI
 Debt

Click to edit the document details