MGT 181 Lecture Notes - Lecture 7: Preferred Stock, Financial Risk, Underwriting
25 Dec 2015
School
Department
Course
Professor
Document Summary
The return earned on assets depends on the risk of those assets. The return to an investor is the same as the cost to the company. The required return is the same as the appropriate discount rate and is based on the risk of the cash flows. The cost of equity is the return required by equity investors given the risk of the cash flows from the firm. Business risk: the risk of the firm"s assets when no debt is used. Financial risk: takes into account a company"s leverage. There are two major methods for determining the cost of equity: dividend growth model and. The security market line approach: re = rf + be(e(rm)-rf) The cost of debt is the required return on our company"s debt. It focuses on the cost of long- term debt or bonds. The cost of debt is not the coupon rate. Preferred stock generally pays a constant dividend each period.
