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Monday, August 25, 2008


Test on Friday just before mid-semester break. (Karen is absolutely screwed for it.....yay~!!!)

Return in bonds can be calculated by constant growth model but it is not the preferred model. Bonds should be valued by the yield to maturity.

Karen has forgotten to turn off the sound of her macbook therefore she is too scared to turn it on...

Preferred stocks are valued by the perpetuity model because the dividend is assumed to be constant and expected.

Lecturer is going through a Weighted Average Cost of Capital example. Calculate the percentage of capital from the different sources. Calculate the return from each source. Bonds are taxed. Multiple each weight with it's respective return.

CAPM: Capital asset pricing model. Calculated from face value of return with a multiple of the risk premium added on.

WACC should only be used if the project is a "carbon copy" of the firm. If that is the case then only invest in a project I it's IRR is greater than the return demanded by debt. Carbon copy meaning the nature of the project being very similar to the firm's normal operations.

Increasing debt will increase financial risk, lenders demand higher return, shareholders may require higher return. The WACC may actually increase because the debt no longer remains cheap.

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