ADMN 3200H Lecture Notes - Lecture 10: Capital Asset Pricing Model, Capital Structure

• School: Trent University
• Department: Business Administration
• Course: ADMN 3200H
• Professor: Jaime Morales

Document Summary

Know how to determine a firm"s cost of equity capital. Know how to determine a firm"s cost of debt. Know how to determine a firm"s overall cost of capital and how to use it to value a company. Understand some of the pitfalls associated with a firm"s overall cost of capital and how to manage them. The cost of equity is the return by equity investors given the risk of the cash flows from the firm. There are to major methods for determining the cost of equity: dividend growth model, sml or capm. Start with the dividend growth model formula and rearrange to solve for re. Investments with same level of risk should have the same return. If the beta is more than one, it is more risky than the rest of the stocks. If the beta is less than one, it is less risky. The cost of debt is the ytm, after tax.