Re = Ro + (Ro – Rd)(1 – tax rate)(Debt/Equity)
Ro = cost of all equity company
Re = cost of equity for the firm
Rd = cost of debt for the firm
Solve for the variable you do not have.
Constant Dividend Payout Policy
Overvalued
vs. its intrinsic value since the market is placing a lower discount rate on its cash flows.
 A factor model describes asset returns.
 There are many assets, so investors can form welldiversified portfolios that eliminate assetspecific risk, not factor risk.
 No arbitrage opportunities exist among welldiversified portfolios.
the loss of degrees of freedom when additional independents variables are added to a regression.
that the error term in the regression is covariance stationary. Therefore the two time series are cointegrated.
The parameters and standard errors from linear regression will be consistent and will allow testing of the hypotheses about the longterm relationships between the two series.
Structural Model  Reduced Form Model 



TAX
and is defined as operating profit divided by capital employed
ROCE is useful when comparing peer companies in different countries because the comparison of underlying profitability would not be skewed by low taxes.
Capitalization Rate = WACC – Long term Growth Rate