Cost of Capital

Question 1

WACC formula?

Answer 1

WACC=NIBD/(NIBD+E) r_d*(1-t)+E/(NIBD+E) r_e

Question 2

CAPM formula?

Answer 2

r_e=r_f+β_e (r_m-r_f )

Question 3

_____ expresses how much an investor can earn without incurring any risk

Answer 3

The risk-free rate

Question 4

Which of the following relations are true?

a) β=0→ Risk-free investment
b) β<1→ Equity investment with less systematic risk than the market portfolio
c) β=1→ Equity investment with the same systematic risk as the market portfolio
d) β>1→ Equity investment with greater systematic risk than the market portfolio
e) All of the above

Answer 4

e)

Question 5

What are the 5 steps when calculating beta from comparable companies?

Answer 5

1. Identify comparable listed companies (peer groups) with sufficient liquidity (trading) of shares. It is important that the chosen peers have the same risk profile and hence business model
2. Estimate β for each of the comparable companies
3. Calculate the unlevered β→β_a for each of the comparable companies (adjustments for financial risks
   β_a=(β_e+β_d*NIBD/E)/((1+NIBD/E) )
4. Calculate the average of unlevered βs for comparable firms

5.Calculate β for the target company levering unlevered β from comparable companies
β_e=β_a+(β_a-β_d )*NIBD/E

Question 6

Estimate of r_d - formula?

Answer 6

r_d=(r_f+r_(credit spread) )*(1-t)