2020-02-18

Reading 33. Cost of capital
33a. calculate and interpret WACC
33b. Describe how taxes affect the cost of capital from different capital sources.
WACC/WCC-determine the proper rate to discount the cash flow with capital budgeting project
weighted average cost of capital
marginal cost of capital
capital components of the firm
cost of capital
WACC的计算
33c.Describe the use of target capital structure in estimating WACC hand how target capital structure weights
33d. Explain how the marginal cost of capital and investment opportunity schedule are used to determine the optimal capital budget
marginal cost of capital curve
investment opportunity schedule
optimal capital budget
33e. Explain the marginal cost of capital's role in determining the NPV of a project
33f. Calculate and interpret the cost of debt capital using yield-to-maturity approach and debt-rating approach
after-tax cost of debt
matrix pricing
33g.Calculate and interpret the cost of noncallable, nonconvertible preferred stock.
33h.using CAPM model,the dividend discount model approach and bond-yield plus risk-premium approach.
cost of equity capital-required rate of return on the firm's common stock.
1.capital asset pricing model approach
step 1:estimate the risk-free rate
step 2:estimate the stock's beta
step 3: estimate the expected rate of return on the market
step 4. use CAPM equation

2. the dividend discount model approach
   P0=D1/k-g
   3.Bond yield plus risk premium approach
   k=bond yield +risk premium
   33i. Calculate and interpret the beta and cost capital for a project.
   project's beta is measure of its systematic or market risk.
   pure-play method
   beta is estimated using historical returns data.
   estimate is affected by index is chosen to represent the market return.
   betas are believed to revert toward 1 over time.
   estimates of beta for small-capitalizations firms need to be adjusted upward to reflect risk
   33j. Describe uses of country risk premiums in estimating the cost of equity.
   country risk premium
   sovereign yield spread
   33k. Describe the marginal cost of capital schedule, explain why upward-sloping with additional capital and calculate and interpret its break points.
   MCC-marginal cost of capital-cost of raising an additional dollar of capital.
   marginal cost of capital schedule shows the WACC for different amounts of financing.
   break points occur any time the cost of components of company's WACC changes.
   break point=amount of capital at which component's cost of capital changes/weight of component in the capital structure
   33I. Explain and demonstrate the correct treatment of flotation costs
   Flotation costs-fees charged by investment bankers when a company raises external equity capital.
   Incorrect Treatment of Flotation costs
   Correct treatment of Flotation costs