1. Week 2 - Capital Structure
2. **Week 1 - Cost of Capital**
2.1. The Weighted Average Cost of Capital - WACC **K**
2.1.1. Market values should be used
2.1.2. Costs of some forms of finance is tricky eg convertibles, leases etc
2.1.3. WACC relates to long term finance (equity and debt) so excludes short term finance.
2.1.4. When Can Current WACC be used as Discount Rate
2.1.4.1. Financing mix remains the same, ie debt to equity ratio same
2.1.4.2. Project has the same systematic business risk as existing projects
2.2. Equity **KE**
2.2.1. CAPM - Capital Asset Pricing Model KE
2.2.1.1. Market Beta = B
2.2.1.2. Systematic Risk = RM
2.2.1.3. Risk Premium = (RM - RF)
2.2.2. Dividend Valuation Model
2.2.2.1. Extrapolating Past Growth
2.2.2.2. Problems with DVM
2.2.2.2.1. Share Value might not be PV dividends
2.2.2.2.2. Share prices moves by the minute for larger companiese
2.2.2.2.3. past growth ≠ future growth
2.2.2.3. DERIVED FROM
2.2.2.3.1. Growth rate of dividends = g
2.2.2.3.2. Share Price now = P
2.2.2.3.3. Cost of Equity = KE
2.2.2.3.4. Dividend to be recieved in one year = D1
2.3. Hybrid - Preference Shares **KP**
2.3.1. Dividend = D1
2.3.2. Market Price per preference Share = PP
2.4. Debt **KD**
2.4.1. Redeemable
2.4.1.1. IRR - Internal Rate of Return Trail and error method
2.4.1.2. Current Market Value of one $100 nominal Debenture = PD
2.4.1.3. Annual Interest (Coupon Payment) = i
2.4.1.4. Amount Paybale upon redemption = RV
2.4.1.5. Corporation Tax = t
2.4.2. Irredeemable
2.4.2.1. Interest paid on debt = i
2.4.2.2. Corporation Tax = t
2.4.2.3. Current Market Value of one $100 nominal Debenture = PD