Week 1 Lecture - Corporate Finance II Lecture : Cost of...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
Corporate Finance II Lecture : Cost of Capital: Risk vs. Return
Background image of page 1

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

View Full DocumentRight Arrow Icon
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
Background image of page 2
Previous Unit Topics FINC2011’s topics. Financial mathematics. Ø Future value, present value, compounding interest Ø Annuities, perpetuities Capital Asset Pricing Model (CAPM). Ø Capital Market Line (CML) Ø Security Market Line (SML) Ø Systematic risk, Beta, diversifiable risk Capital budgeting, company cost of capital Market efficiency
Background image of page 3

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

View Full DocumentRight Arrow Icon
Part II Today: Cost of Capital: Risk vs. Return
Background image of page 4
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
Background image of page 5

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

View Full DocumentRight Arrow Icon
We have securities that entitle you to future cashflows: Ø What is the value of these securities? Companies “issue” or sell securities Ø Company value is the value of the securities it has issued Individuals “acquire” or buy securities Ø Individual wealth is the value of the securities they have bought/ invested in
Background image of page 6
The Problem The above is a generalization . . . Ø 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 The present value calculation - the discount rate.
Background image of page 7

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

View Full DocumentRight Arrow Icon
The Problem Prices affect the values of companies and individuals. From prices we move easily to returns: r 1 = P 1 − P 0 P 0 P 1 = Price at time 1 P 0 = Price at time 0 Ø Say you own 100 shares worth $10 each, then Wealth = $1000
Background image of page 8
The Problem Returns can be: 1 Backward looking
Background image of page 9

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

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/22/2011 for the course FINC 2011 taught by Professor Craigmellare during the Three '10 term at University of Sydney.

Page1 / 30

Week 1 Lecture - Corporate Finance II Lecture : Cost of...

This preview shows document pages 1 - 10. Sign up to view the full document.

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