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+ =
==================================Cost of Capital====================================
[Po =Current value of the equity share; Do=Dividend per share paid at time 0; g=Constant rate of
growth of dividends; Ke = Cost of the retained earnings]
1. Ke = Do*(1+g) /Po + g Constant Dividend Growth Model
[gr = Rapid growth rate of dividend during the first n years; gn =Normal growth rate of dividend
continuously for ever; Pn = Share price at the end of n years]
2. Pn = Do*(1+gr)^n*(1+gn) / (Ke gn) Two Stage Growth Model
3. Po = Do*(1+gr) / (1+Ke) + Do*(1+gr)^2 / (1+Ke)^2 + . + Do*(1+gr)^n / (1+Ke)^n +Pn / (1+Ke)^n
Using Discounted Cash Flow (DCF) approach
[E(Rs) = Expected rate of return of the security; Rf= Risk-free rate of return; E(Rm) = Expected rate of
return of the market; |s = Beta co-efficient of the security]
4. E(Rs) = Rf + |s [E(Rm) Rf] Capital Asset Pricing Model (CAPM) Approach
5. E(Rs) = Rf + |s [E(Rm) Rf] or, E(Rs) = (1-|s) Rf + |s E(Rm)
6.
=====Cost of Equity========
7. Net proceeds = Po (1 f). [Po = Gross amount received per share; f =Percent floatation costs.]
8. Cost of the new equity = Cost of the existing equity + Adjustment for the flotation costs
9. Adjustment for flotation costs = Do*(1+g)*f / [Po*(1-f)]
=====Cost of Preference Capital========
10. Kp = D / [Po*(1-f)] [Kp = Cost of Preference share capital; D = Annual dividend]
11. Kat= (1-t) * Kbt [Kat=post-tax cost; Kbt=pre-tax cost; t=corporate income tax rate.]
*We = Proportion of equity in the total capital; Wp = preference shares; Wd = debt ; Ke = Cost
of retained earnings / external equity; Kp = Cost of preference capital; Kd = Pre-tax cost of debt;
t=corporate tax rate; We + Wp + Wd = 1.0]
12. WACC = We * Ke + Wp * Kp + Wd * Kd * (1-t)
13. With constant D/E ratio; |(equity) = |(asset) (1+D/E)
14. With constant amount of D |(equity) = |(unlevered firm) [1+(1-t)*D/E]
===============================Discounted Cash Flow==================================
FV = C
0
(1 + r)
C
0
is cash flow today (time zero),r is the appropriate interest rate.
FV = C
0
(1 + r)
T..
T is the number of periods over which the cash is invested. ; e is a transcendental number approximately equal to 2.718.
NPV = Cost + PV
Continuous Compounding, FV = C
0 .
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