Analyst Approaches to Cost of Capital

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  Question 2 In valuing an investment, several approaches can be used. One of these approaches is the discounted cash flow which uses the cost of capital to discount the set of cash flows of the investment to the present.

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  Question 2: If I am the analyst, I would have done the following differently: 1. Identified and computed a cost of capital other than the Targhee Log Homes' weighted average cost of capital.

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  While the investor is calculating the cost of capital for the company, the rate of interest and tax shield on interest will be taken into consideration. The financing decision will be taken to reduce the level of cost of capital for the firm.

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• DQ5.1 (DQ10-13): What approaches can be taken in valuing a firm's stock when there is no cash dividend payment? DQ5.3 (Problem 10-20): Venus Sportswear Corporation has preferred stock outstanding that pays an annual dividend of $12. It has a price of $110. What is the required rate of return (yield) on the preferred stock?

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• Red Flags that might affect analysts' decisions.

  Therefore, when IRR is less than the cost of capital, the project will not generate enough revenues to provide stockholders with enough returns. The analyst may find this information in the analysis of capital budgeting.

• Calculating cost of capital

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