Cost of Capital Flashcards
What is cost of capital made up of ?
The risk free rate + Premium for businesses risk + Premium for financial risk + Cost of Capital
Draw out the dividend DVM model without growth ?
Po = Do / Re
rearranged
Re = Do / Po
Can you show the DVM model with growth ?
Po = Do (1+g) / (Re - g)
or
Re = Do (1+g) + g / Po
What is meant by the term ex-dividend ?
Ex-dividend means without dividend
What is meant by the term cum-div ?
This term suggest that the dividend is included ?
What is the record date ?
When buyers for shares wont qualify for the dividend
How do you calculate ex dividend share ?
Cum div share price - dividend due
What is the historical growth rate formula ?
g = square root of the number of years with the current dividend / dividend number years ago - 1
What is the gordon growth model ?
g=br
What are some weaknesses of the dividend valuation model ?
Past growth isn’t a predictor of future growth
No growth or constant growth assumptions
Share volatility
no inclusion of capital gains
What is systematic risk ?
risk that effects all industries such as covid
what is unsystematic risk ?
unique risk which is specific to the company or industry such as a drug making a breakthrough
What does each of the betas mean ?
B=0 Risk Free
B=1 in line with the market
B>1 volatile than average market returns
B<1 Less volatile than average market returns
What are some problems with CAPM ?
assumes diversified stock portfolio
assumes perfect capital markets
betas can vary over time
CAPM was only developed for stocks not any other asset classes.
What is irredeemable debt ?
This is debt that doesn’t have a maturity date for repayment
