will the stock price react
When rumors circulate about a +NPV proj avail 2 firm, When S/H’s
learn of mgmt’s decision 2 accept proj, When proj is “officially” accepted (done deal contracts
signed, etc), BUT NOT When cash inflows from proj occur
Japan, France, Germany: job security comes first; UK, USA—divs come first.
Investor FAILS to diversify
: earns/compensated 4 returns on MKT RISK ONLY
Investor diversifies portfolio nationally, holds NO FOREIGN STOCKS….expected portfolio returns
are based upon: the amount of risk in her portfolio based on the amount of typical international
diversification for investors within her country
Higher WACC means more available projs are NEGATIVE NPV
Peak of normal distribution is mean/avg. return—use to infer beta; higher E(ret), higher beta
Stocks: symmetric, norm distribution; “flatness” of distribution indicates risk (std dev). (flatter, more
risk). Prefer RIGHT skewness—stock options: calls/puts, convertible bonds.
(FULLY diversified portfolio…variance good as measure of MKT risk). Lending or borrowing at
risk free rate allows us to exist outside eff frontier. Beta reps each stock’s contribution 2 risk of
portfolio M. Above
Negative betas have returns less than risk-free rate.
COC based on avg. beta of assets—avg beta of assets based on % of funds in each asset.
beta is going to be less than equity beta as long as they have some debt.
Variance expl by MKT risk = R
x variance of returns
95% confidence interval
= beta +/- 2 *
standard error of the beta.
is that the Ri = rf rate + B(return on MKT – risk free rate)
WACC measures req rate 4 projs of AVG RISK.
uses A-T cost of debt bc PROJS
DISCOUNT AFTER TAX CASH FLOWS. Beta of debt measures MKT value of debt.
Debt B <
asset B < equity B
Chars that affect MKT risk (B) of proj: 1)
of cash flows (more cyclical, more MKT risk) 2)
fixed operating costs…more
, more MKT risk (does NOT include fixed costs of debt)
*Total revenues – Total expenses – DEPR = EBT – Taxes = Net Inc + DEPR = A-T cash flow, +/-
change in NWC, assets > liabilities, subtract it, an outflow. *Change in NWC = change in current
assets – change in current liabilities. Current Assets = cash, AR, inventory. current liabilities = AP.
Incr in cash is an OUTFLOW, inc in inven is OUTFLOW, inc in AP/borrowing money is INFLOW.
Inc in AR is OUTFLOW (sales not in form of cash). Count all sales as inflow, whether cash or