SS11 R37 Cost of Capital

Question 1

after-tax cost of debt

Answer 1

(k_d)(1-t)

k_d = yield to maturity

Question 2

dividend discount model

Answer 2

(D1/P0)+g

D1 = D0(1+g)

Question 3

CAPM

Answer 3

RFR + beta*(E(Rmkt) - RFR)

Question 4

country risk premium

Answer 4

CRP = (sovereign yield spread)*(SD of equity index of DEVELOPING country / SD ofsovereign bond market in terms of DEVELOPED market currency)

Question 5

flotation costs

Answer 5

fees charged by investment bankers when a company raises external equity capital

accounted for at the same time as initial cash outlay

Question 6

break point

Answer 6

= amount of capital at which cost of capital changes / weight of the component in WACC

Question 7

unlevering then levering beta

Answer 7

beta_asset = beta_equity*[1/(1+(1-t)D/E)]

beta_project = beta_asset*[1+(1-t)D/E]