RWJ 13 Risk, Cost of Capital, and Valuation

Question 1

When a firm issues new equity to fund a capital budgeting project, how do dividend and capital gains count as costs to the firm?

Answer 1

Dividend paid to a new shareholder cannot be paid to an old shareholder.

Appreciation in the value of the company’s stock is shared by all shareholders. Only part of the capital gain can be captured by the old shareholders.

Question 2

Does the beta of a firm stay the same if its industry stays the same?

Answer 2

Betas are generally stable for firms remaining in the same industry. However, changes in product line, changes in technology, or changes in the market may affect a firm’s beta. An increase in the leverage of a firm will increase the firm’s beta.