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Calculating the Cost of Capital MGT 4850 Spring 2008 University of Lethbridge.

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1 Calculating the Cost of Capital MGT 4850 Spring 2008 University of Lethbridge

2 Introduction http://www.santafe.edu/education/csss/csss08/programinfo.php DCF models using accounting statements to calculate free cash flows The Gordon model –cost of equity based on dividends The Capital Asset Pricing Model The cost of debt WACC RADR

3 The Gordon model Share value and anticipated dividends

4 Supernormal growth 2 growth rates Formula doesn't work

5 Supernormal growth Calculate share price as DCF (dividends and share price at point 5

6 Gordon Model with constant Growth Rate Cost of equity

7 Calculating Cost of Equity Choosing the growth rate

8 Capital Asset Pricing Model Calculating beta of stock returns 125 monthly returns for SP500 and stock A Regression analysis Beta using variance/covariance matrix

9 CAPM cost of capital

10 Regression analysis

11 P/E model (p.37)

12 Cost of Debt

13 WACC (p.42)

14 Using SML to calculate cost of equity Beta as a measure of market risk Regression analysis Covariance of stock returns with market returns

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