Cost of Capital Lecture Notes

This set of flashcards covers key terminology and concepts related to the cost of capital and financial evaluation from the provided lecture notes.

Cost of Capital

The required return necessary to make a project or investment worthwhile.

Weighted Average Cost of Capital (WACC)

The average rate of return a company is expected to pay its security holders to finance its assets.

Cost of Equity (RE)

The return required by equity investors given the risk of investing in a company.

Cost of Debt (RD)

The return that lenders demand on the firm’s debt.

Beta (β)

A measure of a stock's volatility in relation to the market; it indicates the risk associated with a particular security.

Risk-Free Rate (Rf)

The return on investment with no risk of financial loss, often represented by government bonds.

Market Risk Premium

The additional return expected by investors for holding a risky market portfolio instead of risk-free assets.

Dividend Growth Model

A method for estimating the cost of equity through the forecasted dividends of a company.

Capital Asset Pricing Model (CAPM)

A formula used to determine the expected return on an investment based on its risk relative to that of the market.

Preferred Stock (RP)

A class of ownership in a corporation that is given preference in dividend payments and asset liquidation.

After-Tax Cost of Debt

The effective rate of interest a firm pays on its debt after accounting for tax obligations.

Market Value of Equity

The total value of a company's equity based on current market prices.

Dividend Yield

The annual dividend payment divided by the stock's current market price.

Net Present Value (NPV)

The difference between the present value of cash inflows and outflows over a period of time.

Pure Play Approach

Finding comparable publicly traded companies to estimate the cost of capital for a specific project.

Subjective Approach

An approach where subjective adjustments are made to the overall WACC for individual project risks.

Corporate Tax Rate (TC)

The percentage at which a corporation's profits are taxed.

Debt-to-Equity Ratio (D/E)

A measure of a company’s financial leverage calculated by dividing its total liabilities by shareholders' equity.