Question

What is the Cost of Equity? Provide a definition, and suggest least one way that we...

  1. What is the Cost of Equity? Provide a definition, and suggest least one way that we can estimate it. How does this measure reflect risk, and what will make it change?
  1. b. What is the Cost of Debt? Provide a definition, and suggest least one way that we can estimate it. How does this measure reflect risk, and what will make it change?

Homework Answers

Answer #1
Cost of equity Cost of debt
Defination It is the rate of return expected by shareholder's of company who have invested their money into the company Cost of debt is the interest a company pays on its borrowings
Method of estimate [(dividend per share(for next year)/current market price of share]+ growth rate [Interest(1-tax rate)]/Debt
Measure of risk The higher the cost of equity ,the greater will be the risk. The higher the cost of debt,the greater will be the risk.
Because to invest in risky project the rate of return will be higher Because to invest in risky project the rate of return will be higher
What will make it change The expectation of shareholder's will change it(increase or decrease) The market interest rate will change it (increase or decrease)
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