Project Cost of Capital: Risk-Adjusted Discount Rates Explained

A project's discount rate should reflect the risk of its cash flows and financing assumptions. Using the company's existing WACC for...

(177)---THE PURE PLAY TECHNIQUE

The Pure Play Technique Calculate the division’s equity cost of capital The asset or unlevered beta for the division is 0.67. We need to c...

(176)---THE PURE PLAY TECHNIQUE

The Pure Play Technique Calculate the division’s beta We can use the average asset beta of the pure play firms as a proxy for the asset be...

(175)---THE PURE PLAY TECHNIQUE

The Pure Play Technique Estimate asset beta for comparable firms The comparable firms also employ debt to finance their assets. The equity...

(174)---THE PURE PLAY TECHNIQUE

The Pure Play Technique Identify Comparable Firms The critical step is the identification of comparable or pure play firms. These firms sh...

(173)---THE PURE PLAY TECHNIQUE

The Pure Play Technique Suppose XYZ Company limited has three divisions: pharmaceutical division, financial services division and power gen...

Divisional and Project Cost of Capital: Methods and Examples

A diversified company should not evaluate every division and project at one corporate WACC. Required returns should rise or fall with the sy...

Flotation Costs in Capital Budgeting and Cost of Capital

Flotation costs are the legal, advisory, registration, underwriting and other transaction costs of raising new finance. In project appraisal...

Book Value vs Market Value Weights in WACC

When calculating the weighted average cost of capital (WACC) , the weights assigned to debt and equity can materially change the answer. The...

Weighted Average Cost of Capital (WACC): Formula and Example

Weighted average cost of capital combines the required returns of equity and debt using their target market-value proportions. It is a disco...

(168)---CAPM VS DIVIDEND GROWTH MODEL

Capital Asset Pricing Model VS Dividend Growth Model The dividend growth model approach limited application in practice because of its two ...

(167)---COST OF EQUITY AND CAPITAL ASSET PRICING MODEL

Cost of Equity and Capital Asset Pricing Model The Capital asset pricing model (CAPM) provides an alternative approach for the calculation ...

(166)---EARNING-PRICE RATIO AND THE COST OF EQUITY

Earning-Price Ration and the Cost of Equity As a general rule, it is not theoretically correct to use the ration of earnings to price as a ...

(165)---COST OF EXTERNAL EQUITY: DIVIDEND GROWTH MODEL

Cost of External Equity: Dividend Growth Model The firm’s external equity consists of funds raised externally through public or rights issu...

(164)---THE DIVIDEND GROWTH MODEL: ZERO GROWTH

The Dividend Growth Model: Zero Growth In addition to its use in constant and variable growth situations, the dividend valuation model can ...

(163)---THE DIVIDEND GROWTH MODEL: SUPERNORMAL GROWTH

The Dividend Growth Model: Supernormal Growth A firm may pass through different phases of growth. Hence, dividend may growth at different r...