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# RV1: Cost of Capital: How you define it? What are the factors affecting cost of capital?

##  Define Cost of Capital:

- The structure of the capital: Cost of capital is the cost for a business but return for an
investor.
For example : The cost of captital in company X is 5%, which is paid for the investor in debt
and equity.
- Elements: + Cost of Debt: loan and convertialbe bond
+ Cost of Equity: preferred stock and common stock
-Equation
+ Equation 1 : COST= Wl*Cl+Wcb*Ccb+Wps*Cps+Wcs*Ccs
 Wl+Wcb+Wps+Wcs=100%
+ Equation 2 :COST = Wd*Cd+We*Ce
 Wd+We=100%
 The factors affecting Cost of Capital:
1. Cost to get loan (Cl)
2. Dividend paid to stockholers(Ccs)
3. Weights of each component in capital source
4. Brand
5. Opportunity cost
6.Risk of project

*Discuss
1.Cost to get loan is Cost of loan
2.Dividend paid to stockholers is cost of common stock, which is a liability that comes
into existence when a company declares cash dividends for its stockholders
3.Weights of each component in capital source:
4.Brand higher lead to dividend higher and cost common stock higher,and the interest rate
of loan reduce( example VNPT and person A borrow)
5.Opportunity cost: Cost of capital refers to the opportunity cost of making a specific
investment. It is the rate of return that could have been earned by putting the same money
in different investment having similar risk and other characteristic.
6.Risk of project: describes the relationship between the expected return and risk of
investing in a security.
+ CAPM= (Rm-Rf)*Beta+Rf
If the beta is higher, the cost is higher

RV2: What is the Capital Structure? How capital structure affects the cost of capital?
 Definition of capital structure
- Capital Structure refers to the amount of debt and/or equity employed by a firm to
fund its operations and finance its assets. Debt comes in the form of bond issues or
long-term notes payable, while equity is classified as common stock, preferred stock
or retained earnings. Short-term debt such as working capital requirements is also
considered to be part of the capital structure.
 How capital structure affects the cost of capital:
- Debt is a cheaper source of financing as compared to equity. However,
the cost of issuing additional debt will exceed the cost of issuing new equity. For a c
ompany with a lot of debt, adding new debt will increase its risk of default.
A higher default risk will increase the cost of debt, and a high default risk may also d
rive the cost of equity up because shareholders will likely also expect a premium for
 Equity financing is attractive because it does not create a default risk to
the company. Also, equity financing may offer an easier way to raise a large amount o
f capital. However, for some companies equity financing may not be
a good option, as it will reduce the control of current shareholders over the business.

RV3: What are factors affecting your project evaluation? ( thay chua)
- Concept: evalate of rate of return, npv (performance expect)
-Factor: NPV= CF0+CF(1+i)^-1+.....CF(1+n)^-n
 Initial investment requiment: equiment, facilities, copyrights...Cashflow: The higher
the cashflow, the higher the return. The frequency of CF (monthly, quartly, annually);
 Inflows (sales revenue: volume of sale, price) Salvage value (recover a part of
investment cost)
 Outflows ( equipments, working capital ( labor, material. Production. ): Depreciation:
Higher depre -> Lower taxable income EBIT -> lower tax payment; Intial investment for
lands, equip, facilities,v.v;)
 Economic scenarios: Normal ( normal inflation, normal growing demands)
Pessimistic Normal Optimistic best
Worst base case
Volume Demand down Little Grow; Stable Steep growing demand
Price down Little Grown; Stable Growing price
Effect Total inflow decrease Total inflows increase

##  Risk involve: Different project -> Different risk level ->

Use different RRR as discount rate to determine NPV. The higher the risk -> the higher
the RRR -> the lower the present value of CF.
 Interest rate(RRR): Firms borrowed money from the bank for project.
High fluctuation -> Uncertainty of present value. If the interest rate grow up -> PVs of
CFs go down -> margin of project go down.
+ RRR= (Rm-Rf)*Beta+Rf ( rate depend on the maket rate, free rate...)
 Inflation:
Pessimistic Normal Oppotimistic best
Worst base case
Probability 20% 60% 20%
Volume 100 200  300
Price 20 30  40
Effect 2000 6000  12000
EXPECTED= 20% * 2000 + 60%*6000+20%*12000= 6400
 Term: The longer the project: risk higher, RRR higher -> PV of FV go down -
> (higher provision -> reduce margin) + lower NPV
 Cost of capital: Cost of capital is the cost for a business but return for an investor.
 Tax: One project must pay tax rate is 10%, others must pay 15% or 20%
 Exchange rate: ER of Dollar is higher mean that we must pay more VND to exchange
the Dollar.

RV4: How you monitor and control the financial risks of project?
- Monitoring and Controlling process is continuously performed throughout the life of the
project. The Monitoring and Controlling process oversees all the tasks and metrics necessary
to ensure that the approved and authorized project is within scope, on time, and on budget so
that the project proceeds with minimal risk.
- FACTOR: NPV= CF0+CF(1+i)^-1+.....CF(1+n)^-n
-INFLOWS:
+ Sale: go down
+ Demand: down
+ Price: the inflation go up, the sale revenue (P*Q) is reduce
+ Competition: is higher so the demand is reduce and the number decrease => the price
reduce
+ Production capacity: the ability is not enough, the capacity is smaller so much than the
required. Ex: Number of the student is 750 students, the capacity to serve is 500=> the price
go up.
+ Suppliers:

-OUTFLOWS:
+Risk of increase of capital investment: the time to complete a bridge is longer, the money is
paid bigger.
+ Risk of labour cost: in 2002, the salary for lobor only 1000. Now is 3000
+ Risk of input market: The price of power increase, the cost increae, the margin reduce.
+ Equipment price: Inflation increase, the supply decrease, the exchange rate at planing
increase. The truck was bought in 2000 with 1000\$ with 1\$ = 20000VND, now 1\$ = 24000
VND
+ Operation/Fanancial/Economic risk

- The process of controlling and monitoring risks includes the following tools and techniques:
risk reassessment, risk audits, technical performance measurement, reserve analysis, status
meetings. The main input to the risk controlling and monitoring process is the watch list of
the prioritized risks that have been identified for risk responding and treatment actions. The
risk watch list is used as criteria to review work performance data, including deliverables
status, costs incurred, and project schedule progress.

RV5: Principle of Bond valuation, Stock Valuation. Factors affecting valuation? Factors
affecting investment performance?
 What is Bond Valuation
-
Bond valuation is a technique for determining the theoretical fair value of a particular bon
d.
- Factor affect bond valuation: par value, coupon rate,term, year to maturity, number of
coupon payment (annually/semiannally/quaterly), RRR(depond the person who love risk
or not: age, the income levels, risk adversion:RRR is increase, risk taking;RRR is
decrease)
- CAPM = (Rm-Rf)*Beta+Rf
+ The bond for high way , the beta is so low
+ The bond for maritine lines, the beta is high
+ The beta for the train, the beta is low
 Issuers of bond: The risk of Vietnam Government have the beta is high because is
risker than the US Gover.
 Oppotunity cost
 Value of bond:
+ PV par value
+ PV coupon series
+ PV Coupon investment
= Sum of value of bond .
-

 Stock Valuation
- Stock valuation is the method of calculating theoretical values of companies and their
stocks.
The main use of these methods is to predict future market prices, or more generally,
potential market prices, and thus to profit from price movement – stocks that are judged
undervalued (with respect to their theoretical value) are bought, while stocks that are
judged overvalued are sold, in the expectation that undervalued stocks will overall rise in
value, while overvalued stocks will generally decrease in value.
 Factors effecting Stock Valuation :
- Dividend rate
- Year to maturity is infinite
- Interest rates (the cost of borrowing)
- Economic growth (changes in demand)
- Confidence/expectations
- Technological developments (productivity of capital)
- Availability of finance from banks.
- Others (depreciation, wage costs, inflation, government policy)

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