FIN 401 Study Guide - Midterm Guide: Net Present Value, Systematic Risk, Capital Asset Pricing Model

• School: Ryerson University
• Department: Finance
• Course: FIN 401
• Professor: Edward Blinder

Document Summary

The shareholder who receives a dividend that is greater than desired can reinvest the excess. Current income (low tax bracket: uncertainty resolution no guarantee that the higher future dividends will materialize, taxes: - dividend exclusion for corps. The required return is best estimated by computing the ytm on the existing debt. It is not the coupon rate. (semi-annual = ytm*2: preferred stock: pays a constant dividend every period and are expected to be paid every period forever. Rp=d/p0: the weighted average cost of capital: can use individual costs of capital that we have computed to get our average cost of capital for the firm. This average is the required return on our assets, based on the market"s perception of the risk on those assets. Wd = d/v = percent financed with debt: taxes and wacc: we are concerned with after-tax cash flows, so we need to consider the effect of taxes on the various costs of capital.