6 - Cost of Capital Flashcards
1
Q
What is Market Value of Investment?
A
Cash flows from investment discounted at investors’ required rate of return
2
Q
In the WACC calculation
A
Do not deduct tax, DO treat as debt in in gearing calculations
3
Q
What is the perpetuity valuation formula?
A
Kp = D / P
Where D is constant annual dividend, and P is ex-div market value
4
Q
If the Debt is redeemable think…
A
IRR
5
Q
What is Ke?
A
Cost of equity
6
Q
What are the problems with WACC?
A
Which sources of finance to include
Loans without market values
Cost of capital for small companies
7
Q
What defines the optimum gearing level?
A
The balance between the tax shield and bankruptcy concerns
8
Q
Limitations of the Gordon growth model
A
Relies on accounting profits Assumes that b and r remain constant Can be distorted by inflation Relies on historic information Assumes all new finance is from equity and that gearing is held constant
9
Q
In CAPM, if they give you the market risk premium you do not have to…
A
Deduct the risk free as part of the formula
