options: discounted cash flow approach, capital asset pricing model approach; rs

Question

options: discounted cash flow approach, capital asset pricing model approach; rs=(D1/Po) + g, rs=YTM + Rp

A firm's cost of retained earnings, or internal equity, can be estimated using a variety of methods. Match the formula and/or the term to its corresponding description. Estimation method Description Formula The cost is calculated by discounting the stock's expected future cash flows from dividends and capital gains This method assumes that the firm's cost of equity is related to ts cost of debt. The cost is calculated as the sum of the market's risk-free rate and the product of the stock's beta coefficient and the market's risk premium Bond-yield-plus-risk-premium approach | r,-TRF + s (rM-TRF)

Explanation / Answer

(1)

(a) Discounted Cash Flow approach: rs=(D1/Po) + g

(b) Bond yield plus risk premium approach: rs=YTM + Rp

(c) Capital asset pricing approach

(2)

(A) Marginal cost of capital

(B) Breakpoint

(C) Floatation costs

(D) Cost of debt

(E) Weighted average cost of capital

(F) Opportunity cost principle

(G) Target capital structure

(H) Investment opportunity schedule

(I) Cost of capital

(J) Capital components

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