The Cost of Capital - The Firm's Costs of Debt and Equity Capital

8 important questions on The Cost of Capital - The Firm's Costs of Debt and Equity Capital

What is the formula for the effective after-tax borrow rate?

rD(1-TC)

With what formula does one calculate Cost of Preferred Stock Capital?

Cost of Preferred Stock Capital = Divpfd/Ppfd

What are the four steps to compute Cost of Common Stock Capital by the CAPM method? (Fourth step is a formula)

1 Estimate firm's beta of equity
2 Determine the risk-free rate
3 Estimate the market risk premium
4 Apply the CAPM:
Cost of Equity = Risk-Free Rate + Equity Beta x Market Risk Premium
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How does one estimate the beta of a firm?

Rebressing 60 month of a company's returns against 60 months of returns for a market proxy

How does one determine the risk-free rate?

Use the yield on Treasury bills or bonds

How does one estimate the market risk premium?

comparing historical returns on a market proxy to historical risk-free rates

With what formula does one calculate the Cost of Equity with the Constant Dividend Growth Model?

Cost of Equity = Div1/PE + g

When determining the cost of common stock capital, what method is prefered?

CAPM

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