Lecture 5 Cost of capital\

Question 1

How to calculate levered beta?

Answer 1

= BetaUnlevered*(1+D/E(1-t))

Question 2

How to calculate unlevered beta?

Answer 2

= Beta Levered/(1+D/E*(1-t))

Question 3

Some ways to calculate cost of debt (kd)?

Answer 3

Kd = Interest Expenses/Interest Bearing Debt (gross financial debt)
Kd= Net interests (interest expenses minus income)/(Interest Bearing Debt - Extra Cash)
Kd = rf + spread

Question 4

How is risk measured? What are the types of risk?

Answer 4

Traditionally it is measured by volatility: the standard deviations of returns.

Idiosyncratic and Market

Question 5

The four methods of computing Cost of equity (levered) Kel?
1. Implied returns
2. DDM return
3. Accounting return
4. CAPM(main)

Answer 5

1. Implied Return
   Kel = (P1 - P0)/P0 + DPS(1)/P0
2. DDM return
   Kel = DPS(1)/P0 + g
3. Accounting return
   ROE = Kel
4. CAPM (main model)
   Kel = rf + beta(levered!)*(MRP)

Question 6

What is used as risk-free interest rate?

Answer 6

The YTM on riskless government bonds (5y/10y) or the IRS rate

Question 7

How is market return measured?

Answer 7

1. usually a historical return on an index like the SP500
2. Implied in estimates of CF returned to shareholders of the index (dividends) at consensus growth
3. Fernandez index (he asks different CEO’s what they expect)