Calculating the Cost of Capital MGT 4850 Spring 2008 University of Lethbridge.

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Presentation transcript:

Calculating the Cost of Capital MGT 4850 Spring 2008 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

The Gordon model Share value and anticipated dividends

Supernormal growth 2 growth rates Formula doesn't work

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

Gordon Model with constant Growth Rate Cost of equity

Calculating Cost of Equity Choosing the growth rate

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

CAPM cost of capital

Regression analysis

P/E model (p.37)

Cost of Debt

WACC (p.42)

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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