MTRC Case Study FAQs/Comments It is okay to earn the cost of capital. It is also appropriate to use different rates for different projects depending on the level of risk. Future interest rates or current weighted average cost of borrowing? o If possible, use expected future borrowing costs which is reflected in the yield curve. Upward sloping. ROE not appropriate as cost of equity. It is a component in finding g when we use the dividend growth model. og = br o growth = retention ratio * ROE Not appropriate to look at just dividend yield as the cost of equity. Ke = D1 Po +9 If using the dividend growth model approach, we also add the growth rate 'g' which measures the expected future constant growth rate of dividends. Do we include the cost of issuing new capital? Yes if it is available - issuance cost increases the cost of capital o In practice, usually ignored because not readily available. What is the impact of deferred tax liabilities? o Tax regimes usually allow faster depreciation for tax purposes to encourage investment Lower taxes paid today but will be paid in the future. Deferred tax can be thought of as an allocation from current