# Formular to Debt

**Topics:**Capital asset pricing model, Weighted average cost of capital, Investment

**Pages:**3 (634 words)

**Published:**May 29, 2011

Unlevered Beta: Beta levered/[1+(1-tax rate)x(D/E)]

Levered Beta: (D/E*(1-Tax Rate)+1)*Unlevered Beta

What Does Market Risk Premium Mean?

The difference between the expected return on a market portfolio and the risk-free rate.

What Does Weighted Average Cost Of Capital - WACC Mean?

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm's equity

D = market value of the firm's debt

V = E + D

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula:

NPV = Present Value (PV) of the Cash Flows discounted at WACC. What Does Cost Of Equity Mean?

In financial theory, the return that stockholders require for a company. The traditional formula for cost...

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