Cost of equity: CAPM, expanded CAPM, build-up CFA Flashcards - Medical Study Cards
Master Cost of equity: CAPM, expanded CAPM, build-up with Oncourse flashcards. These spaced repetition flashcards are designed for medical students preparing for NEET PG, USMLE Step 1, USMLE Step 2, MBBS exams, and other medical licensing examinations.
Cost of equity: CAPM, expanded CAPM, build-up Flashcard Deck - 10 Cards
Flashcard 1: Bond-yield + risk premium method to estimate cost of equity
Answer: cost of equity = risk premium + YTM of company's long-term debt
- method for company with publicly traded debt
- (-) risk premium is arbitrary, may not be perfect
Flashcard 2: Methods to estimate the required return on equity
Answer: - Dividend discount model
- bond-yield + risk premium
- Capital Asset pricing model
- Multifactor: Fama-French (3 & 5 factor)
Flashcard 3: Expanded CAPM
Answer: required return = rf + BpeerERP + SP + IP + SCRP\
Bpeer: industry beta from peer public companies
Flashcard 4: Discount rate for equity =
Answer: \= R + π + θ + λ + κ
λ: credit spread\
π: expection inflation\
θ: inflation premium\
κ: risk premium for equity vs. risky debt
Flashcard 5: Two approaches to estimating the cost of equity of a foreign company?
Answer: 1. country risk premium
2. expanded CAPM
Flashcard 6: What is the rental price of capital?
Answer: marginal cost of capital (r)
Flashcard 7: How are earnings considered adequate?
Answer: can cover company's cost of capital
Flashcard 8: Estimate cost of debt on non-traded
Answer: - matrix pricing (interpolated yield)
- if debt not credit rated, use interest coverage ratio or financial leverage to infer
- if rate on existing bank debt not useful, use leases
- if leases undisclosed, use the incremental borrowing rate (the rate on a new secured loan over the same term)
Flashcard 9: 3-Factor Fama French model to estimate cost of equity
Answer: required return = rf + ERP + SMB + HML\
SMB: size premium (avg. difference in return of small caps over large-caps)\
HML: value premium (avg. difference in return of high book to mkt over low book to mkt portfolios)
Flashcard 10: What is interest expense?
Answer: financing cash flow to bond holders that is available to the firm before it makes any payments to its capital suppliers
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