{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Notes 4-30-08 (CH11)

Notes 4-30-08 (CH11) - Capital Structure – mix of long...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
4/30/08 Notes CH11 Risk Return and capital budging Beta – measures the sensitivity of the stock return compared to the overall market Beta for the overall market is 1 T-bills have a beta of 0 Overall market – rm Market risk premium = rm – rf Return on a given stock – r Risk premium (on given stock) - r – rf = B ( Rm – Rf) Capital Asset Pricing Model – theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium R = rf + B ( rm – rf) Securities market line – visual representation of the CAPM R = dividends + capital +/- Po Treasury bill is a short term note CH12 Cost of Capital – The return that a company’s investors could expect to receive if they invested in securities (D, E) of similar degrees of risk.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Capital Structure – mix of long term debt (D) and equity (E) D + E = V (value) Geo (or geo thermal) – pays 8% for debt (cost of debt) Pays 14% for equity (cost of equity) Market value of debt - $194 = 30% Market value of equity - $453 = 70% V = $647 Company return = (30%)(8%) + (70%)(14) Company return = 12.2% Debt is issued out as a bond and it is tax deductable. Tax rate of 35% The cost of debt after tax 8% * (1-tax rate) = 8%(.65) = 5.2% Company return = (30%)(5.2%) + (70%)(14%) Company return = 11.4% WACC – weighted average cost of capital -expected rate of return on a portfolio of all the firms securities WACC = (D/V) * (r debt) * (1-tax rate) + (E/V) * (r equity)...
View Full Document

{[ snackBarMessage ]}

Page1 / 2

Notes 4-30-08 (CH11) - Capital Structure – mix of long...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon bookmark
Ask a homework question - tutors are online