LECTURE_WK 1_1 - Corporate Finance II Lecture : Cost of...

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Corporate Finance II Lecture : Cost of Capital: Risk vs. Return
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Part I Review of Previous Lecture
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Part I: Review of the FINC2001 Material Review of Previous Unit Part I: Review of the FINC2011 Material 1 Summary of the FINC2011 Material Topics
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Previous Unit Topics FINC2011’s topics. Financial mathematics. Future value, present value, compounding interest Annuities, perpetuities Capital Asset Pricing Model (CAPM). Capital Market Line (CML) Security Market Line (SML) Systematic risk, Beta, diversifiable risk Capital budgeting, company cost of capital Market efficiency
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Part II Today: Cost of Capital: Risk vs. Return
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Lecture Summary: Outline of Today’s Lecture 1 Introduction 2 The Problem 3 Measuring Returns : Arithmetic & Geometric Average 4 Measuring Risk : Variance (Standard Deviation) 5 A Recap of Variance and Covariance 6 How Securities Affect Portfolios 7 Risk and Return in Portfolios 8 The Relationship Between Risk and Return A CAPM Example
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Introduction Read the course outline carefully. Pay particular attention to: 1 The pass criteria 3 The case study due dates. Changing tutorials - see Faculty SIO Tutorials: Preparation Participation Case Study
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We have securities that entitle you to future cashflows: What is the value of these securities? Companies “issue” or sell securities Company value is the value of the securities it has issued Individuals “acquire” or buy securities Individual wealth is the value of the securities they have bought/ invested in
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The above is a generalization . . . Companies and individuals can buy and sell securities Note For ALL securities. Price =PV [Expected future cashflows], = E [ futurecashflows ] discount factor Different models (usually some equation(s)) make different assumptions about: 1 The future cashflows, e.g. magnitude and timing 2 The probability associated with each future cashflow. 3
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.

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LECTURE_WK 1_1 - Corporate Finance II Lecture : Cost of...

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