ACFM 203 flotation cost and ddm/ggm extended

the credit spread depends on…

default and liquidity risk

why would a bond be perfectly priced

bc it reflects that day’s risk

yield to market =

treasury + credit spread

on the day bond is issued, coupon rate

represent all the risk in the market

rate of debt represents

the opportunity cost of debt

in the ddm/ggm, if dividend increases, so will the

earnings

pv reflects

all future anticipated cash flows

realized return is

cash flow from dividend and capital gain

capital gain growth is the

% growth of company

equation for yield when stock is sold

(D1+P1-P0)/P0, where P1 is the price we sold the stock at and P0 is the price we bought the stock

the yield for the stock sold includes

dividend and capital gain yield

the yield for ps is the same thing as the

rate of ps

rate of ps =

fixed dividend payout/share price

why does the dividend for ps not change

because they don’t participate in the growth of the company

rate of debt is perfectly priced as is reflected in the

interest rate, default, and liquidity risk

what is the efficient market hypothesis

assumes the market is somewhat efficient

weak form efficient

cannot look at past pattern to outperform the markets

semi strong form efficient

all info public available goes into stock price (immediately adjust)

strong form efficient

all info (including insider trading) priced into market

strong form efficiency means that all stocks are

perfectly priced

we do not want strong form efficiency because

decreases efficiency by chasing out investor who aren’t insiders

large cap stock is more efficient than a

small cap stock

price of the stock represent what investor feel

the proper yield is

yield using ddm is

opportunity cost of investing in shares

dividend yield and capital gain growth increases by the same

percentage

if we issue new ps & equity we will have

flotation cost

if we are not issuing new capital how are we going to finance machine

through RE

financing through RE lowers

cost of equity (Re)

if we issue new share, cost of equity (Re)

increases

there is always flotation cost in

Rps