Week 2 Flashcards
What is a definition of cost of capital?
Opportunity costs of equity investors and debt suppliers
How to come to the cost of equity?
CAPM method
How to come to the cost of debt?
YTM (bonds outstanding) & spread approach (add spread to risk-free rate)
Name the two types of risk of investments
- non-systematic risk: firm specific risk, can be eliminated through diversification
- systematic risk: affects entire economy. (higher systematic risk –> higher expected return)
Give the formula of CAPM
CAPM = E(Ri) = Rf + Bi* (Rm - Rf)
According to research, how much of the stocks should be boycotted to have a significant effect?
10-20% of the stocks
What does a high cost of capital indicate?
That investors are wiling to pay less for new equity
What does the paper of Hong and Kacperczyk (2009) tells us about sin stocks?
Sin stocks are traded at lower prices + give higher expected returns which cannot be explained by CAPM.
Sin stocks have less institutional ownership (less held by pension funds, banks etc.)
Sin stocks give an abnormal return & higher cost of equity than CAPM predicts –> equity financing is expensive