Summary Cost of Capital Latest Verified Review 2023 Practice Questions and Answers for Exam Preparation, 100% Correct with Explanations, Highly Recommended, Download to Score A+

Cost of Capital Latest Verified Review 2023 Practice Questions and Answers for Exam Preparation, 100% Correct with Explanations, Highly Recommended, Download to Score A+ A fundamental part of financial management is investment appraisal: into which long-term projects should a company put money? Discounted cash flow techniques (DCFs), and in particular net present value (NPV), are generally accepted as the best ways of appraising projects. In DCF, future cash flows are discounted so that allowance is made for the time value of money. Two types of estimate are needed: 1 The future cash flows relevant to the project. 2 The discount rate to apply. This article looks at how a suitable discount rate can be calculated. THE COST OF EQUITY The cost of equity is the relationship between the amount of equity capital that can be raised and the rewards expected by shareholders in exchange for their capital. The cost of equity can be estimated in two ways: 1 The dividend growth model. Measure the share price (capital that could be raised) and the dividends (rewards to shareholders). The dividend growth model can then be used to estimate the cost of equity, and this model can take into account the dividend growth rate. The formula sheet for the Paper F9 exam will give the following formula: P0 = D0(1 + g) (re – g) This formula predicts the current ex-dividend market price of a share (P0) where: D0 = the current dividend (whether just paid or just about to be paid) g = the expected dividend future growth rate re = the cost of equity