Week 2 Flashcards

1
Q

What is a definition of cost of capital?

A

Opportunity costs of equity investors and debt suppliers

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2
Q

How to come to the cost of equity?

A

CAPM method

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3
Q

How to come to the cost of debt?

A

YTM (bonds outstanding) & spread approach (add spread to risk-free rate)

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4
Q

Name the two types of risk of investments

A
  1. non-systematic risk: firm specific risk, can be eliminated through diversification
  2. systematic risk: affects entire economy. (higher systematic risk –> higher expected return)
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5
Q

Give the formula of CAPM

A

CAPM = E(Ri) = Rf + Bi* (Rm - Rf)

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6
Q

According to research, how much of the stocks should be boycotted to have a significant effect?

A

10-20% of the stocks

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7
Q

What does a high cost of capital indicate?

A

That investors are wiling to pay less for new equity

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8
Q

What does the paper of Hong and Kacperczyk (2009) tells us about sin stocks?

A

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

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