Theories of Finance

Cost of Capital

Cost of Debt (Kd)

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

Kd= (1-t)

Cost of Equity

Simple dividend growth model

Mixture dividends and capital gain

Dividend payout and reinvestment constant

Capital asset pricing model

Investor dont recive returns for taking risks

Risk free rate

Market risk

required return of investment

WACC

Average Costs of debt and cost equity

Weak Form

Price moves are random and no controlled by past trends

Semi-strong form

Published information is included in share price

Strong form

All information is reflected in share price

Money now is worth more than money in the future

Net Present Value (NPV)

Evaluate amount that worth between present and terminal value

Discounted Cash Flow (DCF)

Applies discounting factors to each future expected CF

Perfect competition dividend policy is irrelevant

Dividends increase and borrowing constant--> Financial GAP

Raising Equity

Reduce value existing shares