Return and Risk: The Capital Asset Pricing Model (CAPM)
11.2 Expected Return, Variance, and
Consider the following two risky asset world. There is a 1/3 chance of
each state of the economy, and the only assets are a stock fund a
Discounted Cash Flow Valuation
What is finance?
Finance is a hybrid of:
Economics (choosing amongst tradeoffs)
Statistics (dealing with uncertainty)
Accounting (the language of business
Common Theme of Finance:
Value of a
Interest Rates and Bond Valuation
Now that you can value a project,
Whether its a project or a firm (which is a collection of projects), the
entrepreneur needs access to capital to finance the deal
In Chapters 8 and 9, we will
Net Present Value and Other Investment Rules
So now that we can value cash
flows, whats next?
As managers, we want to use these skills to
help us decide whether or not the firm should
take a project
Should the firm build a $50MM manufactur
Capital Structure: Basic Concepts
Capital Structure: The amount of
debt and equity on the firms
Why are we talking about capital structure?
I still dont understand how we calculate a firms expected
Risk, Cost of Capital, and Valuation
(in this chapter, we have to know we are value project or firm)
Final exam large problem in this chapter
Example: GE GE beta online =1.26693 CAPM
Now that we can value a bond, how
about valuing a stock
Remember: The value of any asset is the present
value of its expected future cash flows.
Stock ownership produces cash flows from:
Making Capital Investment Decisions
Didnt we just do this?
Chapters 4 & 5
We learned how to discount cash flows and developed rubrics on
whether or not we take a project.
How do we develop these cash flows?
Do these come from