Valuing Preferred Stock: Vps = annual dividend = D required rate of return kps

Valuing Common Stock:

Common Stock Value With Zero Growth. “A zero growth stock is perpetuity”
P0 = D where: D dividend the investor expect
ks ks required rate of return
Common Stock with Single Holding (one year holding)
Vcs = D1+ P1
(1+ks) (1+ks)
Common Stock : Multiple Holding Periods
Vs = D1
ks – g

Cost of Capital:

Cost of Common Equity
DCF Approach:ks = D1 + g
P0
The CAPM Approach:ks = krf + (km-krf)β
The Risk-Premium Approach: ks = krf + (RPM)β

After-tax cost of debt = kd(1-Tax rate).
Cost of New Common Equity
ks = D1 + g
P0 - flotation cost

Cost of Retained Earning, ks = (D1 /P0) + g

Weighted Average Cost of Capital (WACC)

Capital Budgeting:

Payback Period = BY + UC
CF
BY= the year before full recovery
UC= the unrecovered cost at start of year
CF= the cash flow during the year

Net Present Value
NPV = S Annual Cash Flow - Initial Investment
(1+k)t

Internal Rate of Return: IRR
Initial Investments - S Annual Cash Flows...

...analysts. "For years we have thought about our business strategy, without worrying about financing. Times have changed and we need to think about our cost of capital. Since (a) debt is always cheaper than equity; (b) we have decided to use debt to finance our next major projects." What is your assessment of this statement?
Your Answer Score Explanation
The statement is false.
The statement is true.
The statement is partly true/false.
Total 0.00 / 10.00...

...risk+operational risk = business risk + financial risk = total firm’s risk
EVA = EBIT – TAX = the aftertax operating profit (sometimes referred to as net operating profit after taxes or NOPAT)
* Less the dollar cost of the capital employed to finance these assets = COST OF CAPITAL
Invested Capital =
Cash +
Net fixed assets +
WCR (investment the firm must make to support its operating cycle is the sum of its inventories and accounts receivable minus its...

...Question 1
( 5 points) In a world with no frictions (taxes, etc.), value is created by how you finance a project.
True.
False.
Question 2
(5) The return of equity is equal to the return on debt of a project/firm
Always true.
Never true.
Sometimes true.
Question 3
(10 points) Moogle, Inc. is in the same business as Google, Inc., but has recently retired all its debt to become an all-equity firm. Its return on equity has dropped from 12.25% to 10.60% as a result of this....

...Final Finance Exam Notes
Definitions:
1. Capital Budgeting is the process of evaluating proposed large, long-term investment projects.
Capital budgeting is primarily concerned with evaluating investment alternatives.
The first step in the capital budgeting process is idea development.
A characteristic of capital budgeting is the internal rate of return must be greater than the cost of capital.
One of the simplest capital budgeting decision method is the payback method....

...Finance 301
1. The NPV for the truck and the pulley are $2026.75 and $5586.05 respectively. Since these projects are independent, the company can choose either project. They both will give the company a return higher than 12% as well. (Math is on last page)
2. A. NPV for Alt A is $1892.17 while the payback is 2.86 years. NPV for Alt B is 2289.66 while the payback is 4.62 years. (Math on last page)
B. Since these projects are mutually exclusive only one can be chosen....

...FORMULAS
All four of these formulas use the following terms: inequality, equivalent, and interval. Formula numbers one, two, and three use the term compound inequality. Formula number four uses the term infinity. In these formulas I am going to figure out the weight amounts, better known as (w). Formulas are definitely something that I have had to re-teach myself. They are not super complicated; but, at...

...Question 1
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/projet.
Your Answer | Score | Explanation |
False | 5.00 | Correct. You understand the irrelevance of financing. |
Total | 5.00/5.00 | |
Question Explanation | | |
Fundamental question about value creation. |
Question 2
(5) the return of equity is equal to the return on debt of a project/firm
Your Answer | Score | Explanation |...

...Cost of Capital The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity.
AW´s Cost of Equity Capital RS = RF + β x (RM - RF)
AW´s Cost of Capital of All Equity RS = R0 + B/S (1 – t c) (R0 – RB)
Cost of Equity Capital for WWE´s Widget Venture
RS = R0 + B/S (1 – t c) (R0 – RB)
RWACC for WWE´s Widget Venture RWACC = B/S +B RB (1 – t c) + S/S +B RS
APV...