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:
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...