(C) Discounted Cash Flow Approach
The DCF approach is also called the dividend-yield-plus-growth rate approach, and calculated as
Investors expected to receive a dividend yield (D1/Po) plus a capital gain (g) for a total expected return of Kes. At equilibrium, this expected return would be equal to the required return (Ks).
Ks = Kes
(v) Weighted-Average and Marginal Cost of Capital Concepts
An optimal (target) capital structure is a mix of debt, preferred stock, and common stock that maximizes a firm’s stock price. The goal of the finance manager should be then to raise new capital in a manner that will keep the actual capital structure on target over time. The firm’s WACC is calculated based on the target proportions of capital and the cost of the capital components, all based on after-tax costs. The WACC could be used as a hurdle rate for capital investment projects and is computed as:
The weights could be based on ...