Cost of Capital Factors
The type of capital a company seeks affects its capital cost. Debt capital has a lower cost than equity capital due to its lower risk. Before considering the tax deductibility of interest, the cost of debt comprises the sum of…
Estimating the Cost of Debt
Analysts use several methods to estimate the cost of debt, and the methods depend on the following factors: Type of debt. Debt liquidity. Credit rating. Debt currency. Traded Debt A company with straight debt can estimate its cost of issuing…
The ERP
Equity risk premium (ERP) is the difference between the benchmark risk-free rate and expected equity return. Analysts use ERP to calculate a company’s cost of equity capital. $$ \text{Company } ir_e={Er}_{(f)}+(ERP+IRP) $$ We can estimate the ERP of a company…
Study Notes for CFA® Level II – Corporate Issuers – offered by AnalystPrep
Reading 18: Analysis of Dividends and Share Repurchases -a. Describe the expected effect of regular cash dividends, extra cash dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits on shareholders’ wealth and a company’s financial ratios; -b. Compare…
