Cost Of Long Term Funds Flashcards
How do we calculate cost of equity when we assume no growth?
When we assume growth?
What is D
What is D1
What is g
What is P0
Ke=D/P0
Ke=D1/P0 + g
Constant dividend
Dividend in 1 years time
Growth rate
Current market share value
What is P0 also known as?
How do we work out P0 if not given?
How do we work out D1 if not given?
What is D0
Ex div
P0 = cum div - current div
D1 = D0 x (1+g)
Latest dividend
Dividend Valuation Model
When does it assume the first dividend will be received?
What do we assume in terms of the ex div?
What term implies cumulative dividend?
What is assumed about the cumulative dividend?
In one years time
Latest dividend paid
Quoted
It’s about to be paid
Estimating Dividend Growth
What does the averaging method assume?
What’s the calc?
What does profit retention method assume?
What is the calc and what do the letters stand for?
Future growth = past average growth in dividends
n square root latest div/past div - 1
Profits retained and reinvested lead to future dividend growth
G=r x b
Rate of return
Proportion of profits retained and reinvested
Bonds
What is a Bond?
Where are they bought and sold?
How are they quoted?
What is the coupon rate? What are they quoted? Who is the interest paid to?
Marketable debt
Financial markets
Per $100 nv
Normal rate of interest on bond, % of NV, interest paid to investor
Yield to Maturity Irredeemable Bonds
What is there no? And why?
What is yield not the same as?
What is the equation?
How do we work out the interest payable?
Redemption date, because fixed rate is payable to infinity
Coupon rate
Interest payable/P0
Interest rate x NV of bond
Post Tax Cost of Debt
Why do we work this out?
What’s the equation?
Because the interest paid saves tax
Kd=Interest payable(1-tax rate)/mv of the bond
Yield to Maturity of Redeemable Bonds
IRR is the rate at which?
What is step 1? How do we calculate?
What is step 2?
NPV is equal to nil
Calculate NPV at 2 discount rates
Year description cash flow df1 PV df2 PV
Descriptions MV Interest and Redemption
MV-$ per $100
Interest - % x NV
NV - 100
IRR=L+(NPVL/NPVL-NPVH)x(H-L)
Post Tax Cost of Redeemable Bond
What is the difference?
In the interest portion
interest payable+(1-tax rate)xNV
Post Tax Cost of Convertible Bonds
What can the owner choose between in the future?
What should we assume?
What’s the difference?
How do we work out the convertible option?
What improves as the shares grow?
Why do redeemable bonds benefit from higher interest rates?r
Redeeming at redemption rate or converting to ordinary shares
We work out the ordinary share conversion
Current share price x (1+expected growth)n
Conversion option
Because they don’t have the option to convert
Post Tax Cost of Bank Borrowings
What are bank borrowings normally paid at?
What is the equation?
Variable rate
Coupon rate+(1-tax rate)/P0
Weighted Average Cost of Capital
How are different types of finance weighted?
What is Ke
Kd
Ve
Vd
What is the other way of calculating this not using the formula?
What is not included?
How do we alter this if given a fraction?
Based on proportions of each type
Cost of equity
Post tax cost of debt
Market value of equity
Market value of equity
Market value of debt
Work out the proportions of each out of 100 as a percentage x cost of capital gives wacc join together
Retained reserves
Add the fraction amounts together to get total then work out total as a percentage
Assumptions For WACC
What are the 3 assumptions?
Capital structure stays the same
New investment doesn’t carry significant risk
Don’t expect change in any variables (marginal)
