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Cost of equity

Cost of equity (COE) is: the return required by the shareholders the component of cost of capital (WACC) Cost of equity can be calculated by using several methods, each of which may result in different cost of equity rates: CAPM – Capital Asset Pricing Model Dividend discount model

Cost of debt

Cost of debt is: the return required by the debtholders the component of cost of capital (WACC)   Cost of debt is the interest paid reduced by the tax deduction on the interest.    Cost of debt is calculated separately for each type of debt: irredeemable debt redeemable

Weighted average cost of capital (WACC)

WACC is the mixed cost rate of all possible sources of finance that the company uses (equity, debt, preference shares, retained earnings…). It is calculated as the sum of the rates for each capital type that are weighted by the proportion of each capital type on the total capital amount. WAC

Coefficient beta

Coefficient beta (β) is a measure of systematic risk of the company and its shares compared to systematic risk present in the market. In other words, it measures the proportion of undiversifiable risk present within the company capital that is compared to the overall market (systematic) risk. B

Risk adjusted WACC

Risk adjusted WACC is the adjusted WACC which is used to evaluate projects exposed to different systematic business risk than other activities currently undertaken by the company. The steps used in calculation are (41): 1. Find beta of traded company with similar business characteristics (and the

Steps involved in investment decision-making

1. Analyse the resources that can be invested. They might include: part of equity that can be paid out – e.g. retained earnings other sources – e.g. loan, issue of bonds of shares 2. Find out investment needs, formulate possible investment project and assess them in

Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model (CAPM) is used to calculate the expected rate of return on particular security.  As such, it is used to estimate the cost of equity. The variables of CAPM can be drawn by Security market line (SML).   CAPM formula: risk-free rate + β * market risk premiu

Cost of retained earnings

Retained earnings are the profit that has not been distributed to shareholders and it is certainly not for free.  It is the money that could have been paid out as dividend, but was not – probably due to the fact that the stockholder was not able to achieve better return on investments tha

Marginal cost of capital (MCC)

Marginal cost of capital (MCC) is the rate calculated based on the same formula as WACC, but compared to WACC considers both the existing capital finance as well as all the effects of undertaking the project.   Therefore, there are two adjustments to traditional WACC to obtain MCC recalcul

Unlevered beta

Unlevered beta is beta of the traded company exposed to the similar business risk as our company or our new investment which has been adjusted (unlevered or ungeared) for the effect of financial risk by using a formula (41):     βu – unlevered beta βi – beta of

Investment

Investment is both acquirement of any asset or other item with the intention to obtain a future beneficial output (i.e. the process) AND the invested amount or resource that is sacrificed for the purpose of obtaining the benefits in the future.   The terms included in the investment

Cost-benefit analysis (CBA)

Cost-benefit analysis (CBA) is the analysis that is used to summarize and evaluate costs and benefits relevant with certain decision, project or investment. The main stress is on monetary costs and benefits, but non-monetary ones shall also not be neglected. The monetary effects are often discounted

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