Cost of Equity Capital Calculation Methods Market determined standard Comparable earnings standard.

Slides:



Advertisements
Similar presentations
THE COST OF CAPITAL FOR FOREIGN INVESTMENTS
Advertisements

Cost of Capital Rate of return required by firm’s investors
Capital Budgeting & Risk Invest in highest NPV project Need Discount rate to get NPV.
CHAPTER 13 The Cost of Capital
Calculating the Cost of Capital MGT 4850 Spring 2009 University of Lethbridge.
The DDM and Common Stock Valuation Some quick examples, courtesy of Harcourt –The Effect of Evolving Growth Rates –Valuation via Operating Cash Flow.
VALUATION. Five Categories of Valuation Methods 1. Discounted cash-flow 2. Market-based 3. Mixed models 4. Asset-based methods 5. Option-based methods.
Valuation Chapter 10. Ch 102 Valuation models –Discounted cash-flow –Market-based (multiples) –Residual income Model DCF and risidual income model are.
Financial Markets Prof. André Farber SOLVAY BUSINESS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES Saigon, April 2004.
Lecture: 3 - Stock and Bond Valuation How to Get a “k” to Discount Cash Flows - Two Methods I.Required Return on a Stock (k) - CAPM (Capital Asset Pricing.
1 Foundations of Multinational Financial Management Alan Shapiro John Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University,
Calculating the Cost of Capital MGT 4850 Spring 2008 University of Lethbridge.
Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton.
Intermediate Investments F3031 Review of CAPM CAPM is a model that relates the required return of a security to its risk as measured by Beta –Benchmark.
The Weighted Average Cost of Capital. Cash Flow Standard measure of cash flow: (Rev – OpCost)(1-t c ) + t c Dep -  NWC – Capex OCF Ignore for now.
Valuation and levered Betas
Capital components: debt, preferred stock, and common stock.
Stock Valuation Adam Yoder Misa Ngo. Valuation methods  Discounted Cash Flow: Dividends  Present Value of Growth Opportunities  P/E ratio: Price/ Earnings.
Chapter 14 Cost of Capital
Risk, Cost of Capital, and Capital Budgeting. Valuing a Project When valuing a project you need two things: Initially you were given both (Unit.
The cost of capital is the single most important financial decision-making. Cost of capital is an integral part of investment decision as it is used to.
Background Synergy Value Evaluation Equity Value Cost of Capital Calculation – WACC components Cost of equity Cost of debt D/E ratio Tax rate.
Cost of capital. What types of long-term capital do firms use? Long-term debt Preferred stock Common equity Term loans Retained earnings.
Valuation Chapter 10 Robinson, Munter, Grant. Grant, Munter & Robinson Chapter 102 Learning Objectives Compare and contrast valuation models –Discounted.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 1 1 Fundamentals of Investment Management Hirt Block 1 Basic Valuation Concepts.
The value of common stocks
Long-Run Investment Decisions: Capital Budgeting
Weighted Average Cost of Capital WACC Chapter - 12.
Goal of the Lecture: Understand how to properly value a stock or bond.
Risk / Return. Cost of Capital Minimum rate of return which a company is expected to earn from a proposed project so as to make no reduction in the earning.
Capital Asset Pricing Model PWC Course Notes P11 Mark Fielding-Pritchard mefielding.com1.
Cost of Capital Professor Ronald Miolla. Agenda 1) What is Cost of Capital? 2) How to compute Cost of Capital. 3) Cost of debt. 4) Cost of equity.
MD. FARHADUL ISLAM ID : WELCOME TO THE PRESENTATION.
Capital Asset Pricing Model (CAPM) A model based on the proposition that any stock’s required rate of return is equal to the risk-free rate of return.
Cost of Capital Chapter 11. Chapter 11 - Outline Weighted Average Cost of Capital Cost of Debt Cost of Preferred Stock Cost of Common Equity: – Retained.
1 CHAPTER 9 The Cost of Capital. 2 Topics in Chapter Cost of capital components Debt Preferred stock Common equity WACC.
Cost of Capital FWhat is the appropriate discount rate? FCapital Structure involves the use of: F FOptimal Capital Structure:
9-1 CHAPTER 11 The Cost of Capital Sources of capital Component costs WACC.
The Dividend Growth Model Approach
W ALL S TREET W EST W ORKSHOP Oct/Nov O UTLINE Introduction Sources of Data Stock valuation Cost of Capital.
© 2012 McGraw-Hill Ryerson LimitedChapter  Market Risk Premium: ◦ The risk premium of the market portfolio. It is the difference between market.
Corporate value model Also called the free cash flow method. Suggests the value of the entire firm equals the present value of the firm’s free cash flows.
Valuation Part 1. Objectives Firm and equity fair valuation methods o Present value DCF methods o Approximate valuation methods Drivers of equity value.
Dividend Discount Model
Portfolio Management Asset Beta and Equity Beta i)Asset of a firm are financed by Equity or Debt. Firm B/s Equity Asset Debt.
Valuation Concept Part II – Equity Valuation. Valuation of Financial Assets – Equity (Stock) Types of Stock:  Common Stock  Preferred Stock Common Stock.
12-1 McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. CHAPTER 12 Equity Valuation.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Cost of Capital Cost of Capital - The return the firm’s.
1 The Cost of Capital Corporate Finance Dr. A. DeMaskey.
Evaluation Technique Fig. 2. Survey evidence on the popularity of different capital budgeting methods. We report the percentage of CFOs who always or almost.
Why Cost of Capital? – Overall Cost of Capital of the Firm – Investment Proposal- Accept /Reject – Capital Structure – Yardstick to measure the worth of.
1 CHAPTER 10 The Cost of Capital. 2 Topics in Chapter 10 Individual sources of capital and their cost WACC.
Lecture 16 Market Based Valuation & Justified Price Multiples Investment Analysis.
Pricing Financial Assets Timing and Amount of Cash Flows Risk of the Cash Flows Present Value of the Cash Flows discounted at the appropriate level of.
1) The council of your town considers the renovation of an old sports center which does not generate any form of income. In its current state, the center.
Cost of debt = Interest Payments. Debts are the borrowing which company takes to finance the company therefore they have to pay interest on those borrowing.
Discounted Cash Flow Robert Karpinski. What is it? A Discounted Cash Flow (DCF) is generally considered the best tool to value a company.
The Value of Common Stocks
Cost of Equity (Ke).
Video 30 (Topic 6.4): The Cost of Common Stock
THE COST OF CAPITAL.
Cost of capital (Chapter 9)
FINA 4330 The Capital Asset Pricing Model (CAPM) Lecture 15
Finance Review Byers.
Financial Implication of strategic investment decisions
FINA 4330 The Capital Asset Pricing Model (CAPM) Lecture 12 Fall, 2010
Valuation Notes Tom Nelson
THE COST OF CAPITAL FOR FOREIGN INVESTMENTS
Lesson 13-2 SHARE OF NET INCOME ASSIGNED TO PREFERRED AND COMMON STOCK
Valuing Stocks -- Summary of Formula
Presentation transcript:

Cost of Equity Capital Calculation Methods Market determined standard Comparable earnings standard

Market determined standard Earnings-price ratio –Cost of equity capital is equal to the ratio of current earnings per share to the market price per share Discounted cash flow model (DCF) –Formula is (d/p) + g d is current dividend per share p is current market price per share g is expected rate of growth in dividends per share

Market determined standard (cont.) Capital Asset Model (CAPM) –Formula is R f + (R m – R f )β R f is risk free return R M is expected return on a stock market portfolio Β is the beta coefficient (company’s relevant market risk)

Comparable earnings standard Based on the idea of opportunity cost –“capital should not be committed to any venture unless it can earn a return commensurate with that prospectively available in alternative employments of similar risk.”—testimony regarding Tampa Electric Co by S. F. Sherwin. –Examine earnings on common equity for enterprises with similar risk, or with different risk with allowance for risk differences

Feedback: Privacy Policy Feedback
Do Not Sell My Personal Information
About project: SlidePlayer Terms of Service

© 2025 SlidePlayer.com. Inc. All rights reserved.