COMMERCE 3FA3 Study Guide - Midterm Guide: Dividend Policy, Systematic Risk, Capital Asset Pricing Model
29 Dec 2019
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Cost of debt: the required return on a company"s debt. Focus on the cost of long-term debt or bonds: yield to maturity = cost of debt, cost of debt is not the coupon rate. Cost of preferred stock: preferred stock is a perpetuity, required return on preferred stock = dividends / current price. Impact of taxes: dividends are not tax deductible, so there is no tax impact on the cost of equity. Interest expense reduces our tax liability: after-tax cost of debt = required return on debt * (1 - tax rate) Subjective approach to wacc for projects: consider the project"s risk relative to the firm overall. If the project is more risky than the firm, use a discount rate greater than the wacc. Company valuation using wacc: cfa* = adjusted future cash flows, cfa * = ebit * (1 - tax rate) + depreciation - change in nwc - capital spending.
