The Cost of Capital - The Firm's Costs of Debt and Equity Capital
8 important questions on The Cost of Capital - The Firm's Costs of Debt and Equity Capital
What is the formula for the effective after-tax borrow rate?
rD(1-TC)
With what formula does one calculate Cost of Preferred Stock Capital?
Cost of Preferred Stock Capital = Divpfd/Ppfd
What are the four steps to compute Cost of Common Stock Capital by the CAPM method? (Fourth step is a formula)
1 Estimate firm's beta of equity
2 Determine the risk-free rate
3 Estimate the market risk premium
4 Apply the CAPM:
Cost of Equity = Risk-Free Rate + Equity Beta x Market Risk Premium
2 Determine the risk-free rate
3 Estimate the market risk premium
4 Apply the CAPM:
Cost of Equity = Risk-Free Rate + Equity Beta x Market Risk Premium
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How does one estimate the beta of a firm?
Rebressing 60 month of a company's returns against 60 months of returns for a market proxy
How does one determine the risk-free rate?
Use the yield on Treasury bills or bonds
How does one estimate the market risk premium?
comparing historical returns on a market proxy to historical risk-free rates
With what formula does one calculate the Cost of Equity with the Constant Dividend Growth Model?
Cost of Equity = Div1/PE + g
When determining the cost of common stock capital, what method is prefered?
CAPM
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