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Chapters_12_13_Questions[1]

# Chapters_12_13_Questions[1] - Chapter 12 and 13 Notes...

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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 Debt-rating 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

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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.

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