# Capital budgeting t c c r 1 1 d r sdt r 1 r 5 0 1 d r

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Chapter 10 / Exercise 10-4
Fundamentals of Financial Management
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Capital Budgeting + + + + + t c c ) r 1 ( 1 d r SdT r 1 r 5 . 0 1 d r CdT Accounting break-even level in units = v - P D FC + Standard deviation = σ = Risk and Return and Cost of Capital Variance Portfolio return = weighted average of returns of assets in portfolios, with weights = portfolio weights Portfolio standard deviation w. 2 assets , x x 2 x x 2 1 2 , 1 2 1 2 2 2 2 2 1 2 1 P σ σ ρ σ σ σ + + = = Covariance: m j m , j m j ) r , r ( Cov σ σ ρ = , Correlation: m j m j m , j ) r , r ( Cov σ σ ρ = Beta of stock j : . m j m , j j σ σ ρ β = Alternatively, . ) r , r ( cov 2 m m j j σ β = Portfolio beta = weighted average of betas of assets in portfolios, with weights = portfolio weights The capital asset pricing model (CAPM): ). r r ( r r f m f + = β WACC = ], r V E [ ] r ) T 1 ( V D [ equity debt c × + × where V = D + E . WACC = ], r V E [ ] r V P [ ] r ) T 1 ( V D [ equity preferred debt c × + × + × where V = D + P + E .
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Chapter 10 / Exercise 10-4
Fundamentals of Financial Management
Brigham Expert Verified
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