FIN 401 Lecture Notes - Lecture 3: Capital Asset Pricing Model, Risk-Free Interest Rate, Risk Premium

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24 Feb 2016

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Know how to determine a firms cost of equity capital2. Sml approach (referred to capital asset pricing model)3. Know how to determine a firms cost of debt4. Know how to determine a firms overall costs of capital5. Know how to determine a firms cost of equity capital7. Know how to determine a firms cost of debt7. Know how to determine a firms overall costs of capital7. Understand some of the pitfalls associated with a forms overall cost of capital and how to manage them7. Be able to correctly include floatation costs in capital budgeting project9. Flotation costs and the weighted average cost of capital. We know that the returned earned on assets depend on the risk of those assets. Our cost of capital provides used with an indication of how the market views the risk of our. The return to an investor is the same as the cost to the company assets.

Related Questions

Which of the following statements (if any) is (are) true concerning companies that do not pay dividends? a. The cost of equity capital cannot be determined by using the CAPM, the risk premium on debt approach, or by estimating ke for comparable dividend-paying stocks in their industry. b. The dividend capitalization model can be used to determine an accurate cost of equity capital. c. The cost of equity capital is equal to the growth short-term rate of earnings per share. d. The cost of equity capital can be estimated using the Capital Asset Pricing Model.

The optimal capital budget is determined by comparing the expected project returns to the company's

cost of equity schedule

marginal cost of capital schedule

computed break points

optimal opportunity curv

The managerial implications of capital structure theory include all of the following except:

optimal capital structure is influenced heavily by the business risk facing the firm

changes in capital structure result in changes in the market value of the firm's equity

capital structure changes transmit important information to investors

tax shield benefits from equity lead to increased firm value

The major components that determine the risk premium on a specific security at any point in time include all of the following except

interest rate risk

business risk

financial risk

real rate of return risk

If a firm sells assets, generating cash flows, the cost of these funds is ____.

the firm's cost of cash flows

the firm's weighted cost of capital

zero

the firm's cost of equity

Which of the following statements (if any) is (are) true concerning companies that do not pay dividends?

The cost of equity capital cannot be determined by using the CAPM, the risk premium on debt approach, or by estimating ke for comparable dividend-paying stocks in their industry.

The dividend capitalization model can be used to determine an accurate cost of equity capital.

The cost of equity capital is equal to the growth short-term rate of earnings per share.

The cost of equity capital can be estimated using the Capital Asset Pricing Model.

High Adventure is considering a new project that is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of .55 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity?

A. By adding the market risk premium to the after tax cost of debt

B. By mulitplying the market risk premium by 1.55

C. By using the dividend growth model

D. By using the capital asset pricing model

E. By averaging the costs based on the dividend growth model and the capital asset pricing model

FIN 401 Lecture Notes - Lecture 3: Capital Asset Pricing Model, Risk-Free Interest Rate, Risk Premium

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