1026-27 - 1026 assumption firms finance 100 by equity...

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1026 assumption: firms finance 100% by equity reality: capital structure: use both of debt and equity financing Consider the firm a portfolio containing two securities Overall risk of the firm determined by weighed of two securities-beta (assets) o How is the project actually financed? o What’s the actual risk of the project? Beta of debit is 0.2, why? Risk free debt will have a beta of 0 Rating agency assign rating indicating their credit worthiness (***)Debt and COC Balance sheet Assets // financing Financing risk is a output rather than input COC=r(port)=r(assets) r(assets)=WACC(weighted average cost of capital) WACC(after tax) you are allowed to deduct interest for tax expense o Why banks use leverage? To use more tax advantage Measuring betas Regression analysis What do R square mean? o 29% is explained by the market return; 29% of the risk is systematic risk (only thing matters) o run the regression 5 years later- R square doesn’t change much, but the beta becomes larger
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