Module 12 Flashcards
How to calculate ke?
r= D(1+g)/P + g
How to calculate kd?
I(1-t)/ MV ex int
Participants in the stock market can benefit how?
Provide investors with positive returns through dividend and capital growth
Exploit the fact share prices are constantly changing
What is an efficient market?
Prices set in a way that reflect all available information and change quickly and rational to reflect new info
No opportunity to anticipate movement
What are the three types of efficiency?
Pricing
Operational
Allocational
What is pricing efficiency?
Investor can only make risk adjusted return from an investment since prices move in a rational way to news
Efficient markets hypothesis
What is operational efficiency?
Desirable operations are at a low cost
Ensuring competition between buyers and sellers and different exchanges
What is allocational efficiency?
Important resources are allocated where they can be put to best use
Channel funding to most promising investment
Assumes market already pricing and operationally efficient
Why must share markets be efficient?
To encourage share buying
To allow financial management - share price reflects decisions
To help allocate resources - growth companies
WACC =
(%d x kd)+ (%e x ke)
The higher the gearing
The higher the ke
Assumptions of MM theory?
Capital markets are perfect
No tax
No transaction costs
Individuals can borrow at same rate as firm
Home made gearing has same risk as corporate
WACC with tax? MM
(%e x ke) + (%d x kd x (1-t))
