Determination of Cost of Capital Flashcards
1
Q
What is the cost of preferred stock
A
annual dividend/current price
2
Q
What is the cost of common stock
A
CAPM
3
Q
What is the marginal cost of capital?
A
cost of last new dollar of capital raised by the company
4
Q
What is the CAPM
A
= Risk-free return (Rf) + Risk premium related to risk of investment
= Risk-free return (Rf) + Beta (ß) × Market risk premium (RPm)
5
Q
What is the dividend discount model
A
Current share price = dividend paid ( 1+g)/(cost of common equity - g)
