Theories of finance

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Theories of Finance

Dividend Theory

Dividends increase and borrowing constant--> Financial GAP

Raising Equity

Reduce value existing shares

Perfect competition dividend policy is irrelevant

Value of Bonds

Discounted Cash Flow (DCF)

Applies discounting factors to each future expected CF

Net Present Value (NPV)

Evaluate amount that worth between present and terminal value

Money now is worth more than money in the future

Efficient Market Hypothesis

Strong form

All information is reflected in share price

Semi-strong form

Published information is included in share price

Weak Form

Price moves are random and no controlled by past trends

Cost of Capital

WACC

Average Costs of debt and cost equity

Cost of Equity

Capital asset pricing model

Investor dont recive returns for taking risks

required return of investment

Market risk

Risk free rate

Simple dividend growth model

Mixture dividends and capital gain

Dividend payout and reinvestment constant

Cost of Debt (Kd)

Is based on the current market rate for debt of that risk level.

Kd= (1-t)