Define the following terms: a. Cost of debt b. Cost of equity c. After-tax WACC d. Equity beta e. Asset beta f. Pure-play comparable g. Certainty equivalent

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Business

Asher Simmons

10 February, 11:06

Define the following terms: a. Cost of debt b. Cost of equity c. After-tax WACC d. Equity beta e. Asset beta f. Pure-play comparable g. Certainty equivalent

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Summer Compton · Answer 1

A. Cost of debt: This is the rate of a company pays on its debts, such as bonds and loans. Cost of debt is one part of a company's capital structure, with the other being the cost of equity.

B. Cost of equity : This is the return a company needs to decide if an Investment meets capital return requirements.

C. After tax WACC:This is the average after tax cost of a company's various capital sources, including common stocks, preferred stocks, bonds, and any other long term debt. In other words, WACC is the average rate of a company expect to pay to finance its assets.

D. Equity beta:This measures the volatility of the stock to the market that is, how sensitive is the stock price to a change in the overall market. Equity beta is also known as levered beta.

E. Assets beta: This is also known as unlevered beta, this is a beta of a company without the impact of debt. It is also known as the volatility of returns for a company.

F. Pure play comparable : This refers to companies that are in the single line of business. It is also used to find cost of capital for a project that is different from company's mainstream business.

G. Certainty equivalent : This is a guaranteed return that someone would accept now, rather than taking a chance on higher but uncertain, return in the future.