Ratio Analysis
Valuations
Charting Technique
- Popularly known as WACC
- Based on WACC Investors conclude feasibility to undertake the project
- it denotes the rate that is used to discount UNLIVERED FREE CASHFLOWS and TERMINAL VALUE
- WACC shouldn't capital specific., i.e it denotes all the capital Debt,Equity..., Rational behind this is: Cashflow represents to all types of capital(debt+equity)
- WACC should be after Taxe., as Cashflow represents to post tax values
- Denotes about the costs associated with the company to maintain stock Price
- CAPM denotes CAPITAL ASSET PRICING MODEL
- It determines Rate of return of a Security after considering its risk
- It provides the relation between RISK and RATE OF RETURN for a particular asset
- It is used to calculate required rate of return of a risky asset
- Ra = Expected Rate of Return
- Rf = Risk free rate of Return
- Beta - Denotes about Risk
- Rm = Market rate of return
- We can classify risk in two
- UnSystematic Risk associated to Asset Specific Risk
- Systematic risk associated with RISK TO ALL ASSETS
- BETA calculates SYSTEMTIC RISK
- If Beta is > 1, asset risker than Market
- If Beta is < 1, Asset is less risky than Market
- Re = Cost of Equity
- Rf = Risk Free Rate
- Denotes about the Rate the company pay to DEBT HOLDERS
- As companies attains benefits from the TAX deductions on INTEREST PAID, Interest considered based on NET of TAX
Weighted Average Cost of Capital
What is meant by WACC
Points to Remember:
Cost of Equity
CAPM is the method where we can calculate COST OF EQUITY:
Capital Asset Pricing Model
Ra = Rf + Beta(Rm-Rf)
Beta = Risk Premium
Beta RISK Classification:
(i)Systematic Risk (ii) Unsystematic Rick
CAPM Calculation:
Beta:
Equity Market Risk Premium(EMRP):
Cost of Debt
Debt(1-TaxRate)
