Cost of Capital Flashcards

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1
Q

Weighted Average Cost of Capital

A

WACC = Wd x Cd x (1-t) + Wps x Cps + Wce x Cce

Where t = marginal tax rate

Weightings should be based on target capital structure or market values if N/A, or industry avg if N/A

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2
Q

Investment opportunity curve

A

Schedule of IRRs and the amount of capital required to fund the project

Intersection with MCC curve = the optimal amount of capex = amount of investment needed to undertake all positive NPV projects

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3
Q

Cost of PS (Kps)

A

= Annual dividend/market price of PS

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4
Q

Cost of CS (Kce)

A

CAPM = RFR + B x ( ERM - RFR)

or

Kce = (D1/P0) + g

or

Bond yield + Equity risk premium

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5
Q

Beta

A

= Covariance of market / Variance of stock

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6
Q

Pure-play beta estimation

A

1) Unlever the Beta = 1 / (1 + (1-t)xD/E) using marginal tax rate and d/e of the comparable company
2) Relever the Beta = 1 + ((1-t) x D/E) using tax rate and d/e of the target company

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7
Q

Foreign Equity Risk Premium (FRP)

A

FRP = SYS x (STD Equity/STD Bond)

Where SYS = Yield developed - Yield Developing

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8
Q

MCC Breakpoints

A

Debt = Amount of Debt that Inc WACC / Target debt weighting

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