week10 - Week 10 Tutorial Emily Lo Cost of Capital Rate of...

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Week 10 Tutorial Emily Lo
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Cost of Capital Rate of return required by capital suppliers to compensate them for the financing they are providing Cost of capital depends on >> use of capital, i,e. the riskiness of the investment/long term assets, not its source Estimated using WACC Important because: >>provides an indication how market views the risk of firm’s asset >> help us to determine the required rate of return for capital budgeting
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Weighted Average Cost of Capital Source of funds >> Debt, equity, hybrid securities Weighted average of returns required by investors on various securities issued by the firm to raise capital Steps: 1) examine the WACC formula 2) examine the Capital Structure >> find out the weight of Debt, weight of equity… WACC = ( R D D V ) +( R E E V ) +. ..
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Cost of Equity (RE ) Minimum rate of return required by the firm’s owners given its risk Estimated by 1) Dividend growth model Weakness: - Assume pays dividends and are constant or constantly growing
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week10 - Week 10 Tutorial Emily Lo Cost of Capital Rate of...

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