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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital
If these cash flows are strictly those belonging to the company’s owners, such as the free cash flow to equity, or dividends, the analyst uses the cost of equity capital to find the present value of these flows.
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2.3. Applying the Cost of Capital to Capital Budgeting and Security Valuation
ilable.5 For a particular valuation model, if these cash flows are cash flows to the company’s suppliers of capital (that is, free cash flow to the firm), the analyst uses the weighted average cost of capital of the company in the valuation.6 <span>If these cash flows are strictly those belonging to the company’s owners, such as the free cash flow to equity, or dividends, the analyst uses the cost of equity capital to find the present value of these flows.7 In the next section, we discuss how an analyst may approach the calculation of the component costs of capital, focusing on debt, preferred stock, and common equity.


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