Finances Keyterms

Cost of Capital The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity.
AW´s Cost of Equity Capital RS = RF + β x (RM - RF)

AW´s Cost of Capital of All Equity RS = R0 + B/S (1 – t c) (R0 – RB)

Cost of Equity Capital for WWE´s Widget Venture

RS = R0 + B/S (1 – t c) (R0 – RB)

RWACC for WWE´s Widget Venture RWACC = B/S +B RB (1 – t c) + S/S +B RS

APV Taking into account financing benefits, APV includes tax shields such as those provided by deductible interests

All-Equity Value Initial cost+ Depreciation tax shield + Present value of (Cash revenues + Cash expenses)

Flotation Costs are paid immediately but are deducted from taxes by amortizing on a straight-line basis over the life of the loan

Tax Subsidy interest must be paid on the gross proceeds of the loan, even though intermediaries receive the flotation costs.

NPV Compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account.

Non-Market-Rate Financing a number of companies are fortunate enough to obtain subsidized financing from a governmental authority.

The No-Tax Case βEquity = βAsset (1+ Debt/Equity)

The Corporate Tax Case βEquity = (1+ (1 - t c) Debt/Equity) βUnlevered Firm

Unlevered Beta (Equity/Equity + (1-tc) X Debt) βEquity = βUnlevered Firm

Discount Rate RS = RF + β x [RM - RF]

Levered Beta βEquity = (1+ (1 - t c) Debt/Equity) βUnlevered Firm

Discount Rate RS = RF + β x [RM -