Session 11: Cost of Capital

Question 0

rD (Debt Cost of Capital) with YTM

Answer 0

rD=Yield to maturity-prob (default) x expected loss rate

= y-pxL

Question 1

rE (Equity Cost of Capital)

Answer 1

rE=rF+bE(E(Rm)-rF)

last part is the risk premium for the shares of the firm

Question 2

rD with CAPM and debt betas

Answer 2

rD=rF-bxMarket risk premium (E(Rm)-rf)

Question 3

WACC (Weighted average costs of capital) without taxes

Answer 3

rWACC=(E/E+D)xrE+(D/E+D)xrD

Question 4

WACC with taxes

Answer 4

rWACC=(E/E+D)xrE+(D/E+D)xrDx(1-Tc)

Note: Debt can be understood as net debt