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Calculating the Cost of Capital

Calculating the Cost of Capital. MGT 4850 Spring 2009 University of Lethbridge. Introduction. DCF models using accounting statements to calculate free cash flows The Gordon model –cost of equity based on dividends The Capital Asset Pricing Model The cost of debt WACC RADR .

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Calculating the Cost of Capital

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  1. Calculating the Cost of Capital MGT 4850 Spring 2009 University of Lethbridge

  2. Introduction • DCF models using accounting statements to calculate free cash flows • The Gordon model –cost of equity based on dividends • The Capital Asset Pricing Model • The cost of debt • WACC • RADR

  3. Gordon Model with constant Growth Rate • Cost of equity

  4. Cost of Equity p.42

  5. Cost of Equity KELLOGG p.43

  6. Kellogg p.44

  7. All Cash Flows to Equity

  8. Gordon Model with all cash flows

  9. Dividend per share p.47

  10. Supernormal growth • 2 growth rates • Formula doesn't work

  11. Supernormal growth • Calculate share price as DCF (dividends and share price at point 5

  12. Calculating Cost of Equity • Choosing the growth rate

  13. Capital Asset Pricing Model • Calculating beta of stock returns • 125 monthly returns for SP500 and stock A • Regression analysis • Beta using variance/covariance matrix

  14. CAPM cost of capital

  15. Setting the regression in Excel (58)

  16. OUTPUT (p. 58)

  17. Regression graph (p. 54)

  18. Cost of Debt (p.67)

  19. Yield Curve (p.69)

  20. WACC (p.73)

  21. Using SML to calculate cost of equity • Beta as a measure of market risk • Regression analysis • Covariance of stock returns with market returns

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