Business Financing & Capital Valuation Methods
Key Capital & Valuation Concepts
Opportunity Cost of Capital
The value an investor foregoes when choosing not to invest in comparable projects.
Financing Modalities
- Internal: Financial resources belonging to the company (shareholder equity).
- External: Outside resources that generate debt (liabilities).
Share Valuation Methods
- Nominal Value: The value assigned to the title at issuance.
- Accounting Value: Owner’s equity divided by the number of shares.
- Market Value: The price at which stock is sold in the
Essential Financial Formulas and Valuation Concepts
Cost of Capital & Equity Valuation
Weighted Average Cost of Capital (WACC)
- WACC = Wd(YTM(1-Tax)) + (We * re) + (Wpfd * rpfd)
Cost of Equity
- Cost of Equity (Dividend Growth Model) = Div1 / P0 + g
- CAPM Expected Return (re) = Risk-Free Rate + [Beta * (Market Return – Risk-Free Rate)]
- Stock Excess Return = Market Excess Return x Beta
- Investment Expected Return = Risk-Free Rate + [Beta * (Market Return – Risk-Free Rate)]
- Market Value of Equity = Number of Shares x Share Price (also known as Market Capitalization)
Alternative Investments: Concepts & Strategies
Hedge Funds & Private Equity Fundamentals
Service Providers:
Prime brokers provide financing and trading; administrators manage pricing and reporting; custodians safeguard assets.Fee Structures:
Hedge funds typically charge 1–2% management fees and 10–20% incentive fees, often on realized and unrealized gains, unlike mutual funds which charge only flat management fees.Illiquidity in Private Equity:
Investors must deal with capital calls and cannot redeem easily. Secondary markets are thin, especially
Bond Valuation: Zero Coupon, Premium, and Discount Bond Pricing
Problem 8: Bond Coupon Rate Calculation
To determine the annual coupon and coupon rate, we use the following financial calculator inputs and solve for the payment (PMT):
Financial Calculator Inputs (Problem 8)
- N: 10.5 × 2 = 21 (semiannual periods)
- I/Y: 6.2% / 2 = 3.1% (semiannual yield)
- PV: -$945 (present value, entered as negative)
- FV: $1,000 (face value)
- PMT: Solve for $27.40 (semiannual coupon payment)
Based on the semiannual payment, we can calculate the annual coupon and coupon rate:
- Annual coupon
WACC Calculation & Capital Budgeting Decisions
Weighted Average Cost of Capital (WACC) Applications
This document presents two case studies demonstrating the calculation of the Weighted Average Cost of Capital (WACC) and its application in capital budgeting decisions. Each case includes a problem statement, detailed calculations, and project acceptance criteria.
Case Study 1: Empire Electric Company (EEC)
Problem Statement: EEC WACC & Project Selection
Empire Electric Company (EEC) utilizes only debt and common equity in its capital structure.
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Stock Valuation Problems
NU YU Dividend Valuation
NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.57 a share. The following dividends will be $0.62, $0.77, and $1.07 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.8 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?
Calculation
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