Coporate finace - Admission/Application Essay Example

Therefore, the cost of equity using the dividend growth model is: This is a model that describes the relationship between the risk and expected return. The idea behind CAPM is that investors need to be compensated in two-way including risk and time value of money.2 The time value of money is in a company is represented by the risk-free (rf) rate as indicated in the formula. The risk-free rate compensates investor for putting money in an investment over a period.3 The other part of the formula represents risk and looks at the amount of compensation that the investor requires for taking more risk.

This takes beta, which is a risk measure that compares the return of assets to the market over time and to the market premium. CAPM assumes that investors need more returns for taking greater systematic risk. The rate of return on risk-free securities applied in this calculation is the Australian government bond because it is the safest form of investment. This rate has been quoted as 2.38% over a period of 10 years.4 The assumption here is that this rate is constant over the years. The beta of this company is 1.

212383 as calculated in Appendix one. This was calculated based on weekly returns from January 2013 to January 2015. This period was chosen for a more accurate beta and on the assumption that it will be constant in the future.5 There is a difference in the cost of equity when calculating using the CAPM method and the dividend growth method. The assumption is that the difference is as a result of the risk consideration while using CAPM. The dividend growth method does not consider the risk of the investment.

6 The cost of debt is the overall rate that a company pays while using debt financing. This rate is useful for investors in determining the riskiness of the as compared to others. A higher cost of debt indicates that the company is riskier.7 It is measured before tax or after deducting tax returns.8 This is usually included in the company’s