Model download free ebooks at bookbooncom 41

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Unformatted text preview: ook-value stocks (high minus low) As the three factor model was suggested by Fama and French, the model is commonly known as the Fama-French three-factor model. Download free ebooks at bookboon.com 41 Corporate Finance Capital budgeting 6. Capital budgeting The firms cost of capital is equal to the expected return on a portfolio of all the company’s existing securities. In absence of corporate taxation the company cost of capital is a weighted average of the expected return on debt and equity: (36) Company cost of capital rassets debt equity rdebt  requity debt  equity debt  equity The firm's cost of capital can be used as the discount rate for the average-risk of the firm’s projects. Cost of capital in practice Cost of capital is defined as the weighted average of the expected return on debt and equity Company cost of capital rassets debt equity rdebt  requity debt  equity debt  equity To estimate company cost of capital involves four steps: 1. Determine cost of debt - Interest rate for bank loans - Yield to maturity for bonds 2. Determine cost of equity - Find beta on the stock and determine the expected return using CAPM: requity = rrisk free + equity ( rmarket - rr...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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