WACC - Cost of Equity

Question 1

How do you calculate Ke?

Answer 1

Do(1+g)/Po + g

Question 2

What does Do stand for in Ke?

Answer 2

Dividend now

Question 3

How to calculate g?

Answer 3

g=br or no of periods, square rate(latest dividend/earliest dividend) -1

Question 4

What does Po stand for in Ke?

Answer 4

Price now, ex-dividend

Question 5

What is WACC?

Answer 5

The cost of finance for investment appraisal

Question 6

Requirements for WACC? POP

Answer 6

Project Marginal, Operational risk is the same, Proportion raised the same

Question 7

What does b stand for in g=br

Answer 7

Retained earnings

Question 8

What does r stand for in g=br

Answer 8

ARR

Question 9

Assumptions of Ke?

Answer 9

Growth is constant, dividend paying company, all factors of Ke are known

Question 10

If the dividend is given in 3 years time, how would you deal with this?

Answer 10

Discount back to present value

Question 11

What is the formula for CAPM Ke?

Answer 11

Ke=RF+B(RM-RF)

Question 12

What does the RF stand for in CAPM Ke?

Answer 12

RF= risk free rate (gov bond)

Question 13

What does the RM stand for in CAPM Ke?

Answer 13

RM= average market return

Question 14

What does the B stand for in CAPM Ke?

Answer 14

B=beta

Question 15

Beta is a measure of…

Answer 15

Systematic risk (market risk)

Question 16

Assumptions for CAPM?

Answer 16

Fully diversified, no unsystematic risk (business specific risk), no transaction fees, perfect markets

Question 17

Assumptions for Beta?

Answer 17

Historic