Breaking into Wall Street Investment Banking Technical 127Exam Study Questions with 100% Correct Answers | Verified|32 Pages

Cost of Equity tells us what kind of return an equity investor can expect for investing in a given company - but what about dividends? Shouldn't we factor dividend yield into the formula? - ️️Dividends are already factored into Beta because Beta describes returns in excess of the market as a whole - and those returns include dividends Two companies are exactly the same, but one has debt and one does not - which one will have the higher WACC - ️️The one without debt will have a higher WACC up to a certain point because equity is more expensive than debt Why? 1. interest on debt is tax-deductable 2. Debt is senior to equity in company's capital structure 3. Interest Rates on debt are lower than Cost of Equity Numbers Once debt is high enough the Interest rates will increase and cause risk to increase U-shape curve where debt decreases WACC unit a point where it starts to increase it When you are calculating WACC, let's say that the company has convertible debt. Do you count this as debt when calculating Levered Beta for the company? - ️️1. If it is in the money then you do not count it but assume it contributes to dilution and increases Equity Value 2. If it is out of the money the you count it as debt and use the interest rate on the convertible for Cost of Debt