Chapter 6

1. Nominal or Actual Rate of Interest

2. Valuation of Assets (Basic Valuation Model)

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3. Bond Valuation: Basic Bond Valuation
Semiannual Interest and Bond Values

The Current Yield = the annual coupon Interest / the current market price

Chapter 7
Basic Common Stock Valuation Equation

P0 = value of common stock

Dt = per-share dividend expected at the end of year t

Rs = required return on common stock

P0 = value of common stock
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Zero Growth Model (perpetuity)

P0= D1/Rs

Constant-Growth Model (Gordon model)

Chapter 8
Total rate of return earned on any asset over period t, r t

Expected value of a return (r) (SINGLE)

Standard Deviation

Coefficient of variation, CV

Portfolio Return (portfolio)

Expected value of a return (r)

R= ri/n (the average)

Standard Deviation
Chapter 9
Before-tax cost

I = annual interest in dollars

Nd = net proceeds from the sale of debt (bond)

n = number of years to the bond’s maturity

After-tax cost of debt, ri,

ri = rd × (1 – T)
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Cost of preferred stock, rp Cost of common stock equity, r s
 N n = current market price of the stock
(The net proceeds price)

Capital asset pricing model (CAPM)

r s = R F + [b × (r m – R F )]
Cost of retained earnings, rr
rr = rs

New Issues of Common Stock

N n represent the net proceeds from the sale of new common stock after subtracting underpricing
and flotation costs, the cost of the new issue