- Annuity vs. Perpetuity - Given information for examples 1 and 2 in Ch. 12: The firm's net cash flow is $2,000,000 per year indefinitely (perpetuity), the tax rate is 40% and the required return of common stockholders is 10% (calculated using CAPM formula) - Examples 1 and 2 in Ch. 12 use the formula for present value of a perpetuity: PV= Free Cash Flow/Discount Rate - Example 2 in Ch. 12: A corporation's cost of debt will always be lower than the cost of equity due to the risk/return relationship; fixed vs. residual claimants; coupon rate on bonds is lower than the required return of common stockholders - Example 7 in Ch. 12: Calculations in 1st paragraph are fair game on the final exam - Example 8 in Ch. 12: After-tax WACC is the appropriate one for valuation purposes - Example 1 in Ch. 13: Both formulas are fair game on the final exam Examples 1,2,7 and 8 in Ch: 12 and example 1 in Ch. 13. For examples 1 and 2 in Ch.12, assume the net cash flow is $2,000,000, the tax rate is 40% and the cost of common equity is 10% which is computed using the CAPM equation. You do not have te Ho any calculations for this HW assignment. You only need to explain, using separate paragrophs, what each example means: hence, this HW assignment is strictly qualitative. However, vou should be familiar with the calculations since there will be quantitative questions, on the final exam, based on these examples. Note: The supplemental examples for Ch. 12 and 13 are located in the same place as the lecture notes at the top of Modules