FINA2222 Lecture 3 Notes PDF

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MM Proposition 2 and Betas...

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LECTURE 3

¿ :r u=

D E r MM Proposition II: rE+ E+ D D E+ D

“The cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value debt-equity ratio.

r E=r u +

D (r −r ) E u D

If there are multiple securities (a third one could be warrants), WACC is calculated by computing the weighted average cost of capital of all the firm’s securities:

r wacc =r u= β E =β U +

W D E r if given betas: r D+ rE + E+ D+W W E+ D+W E+ D+W

D ( β −β D ) E U

r E=r f +β E (r M −r f )

If given EPS:

EPS=

Earnings Number of Shares

Share Price=

EPS rE...