Class notes
WAAC- Corporate Finance 2 summary
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This notes consist of all helpful formulas. What is covered? Risk, return, cost of equity, CAPM, beta, bonds, risk-return relationship. Examples included.
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Corporate Finance 18.10.2021Profitability of particular project.
Estimating the cost of capital
Investors face the problem of uncertainty that’s why they are facing risk.
Risk- In finance, risk refers to the degree of uncertainty and/or potential financial
loss inherent in an investment decision. In general, as investment risks rise,
investors seek higher returns to compensate themselves for taking such risks.
Some types of risks:
- Business & commercial
- risk, credit or default risk,
- liquidity risk, currency risk,
- interest rate risk,
- inflation risk,
- economic risk
From an investor point of view, its future financial performance can then be
summarized by two measures:
• expected return => average of possible returns.
• risk => measure of return dispersion (variation) around the expected return.
The shareholders’ required return is then the firm’s Cost of Equity. To determine a
firm’s Cost of Equity we need to define:
•a measure of financial returns,
•a measure of return dispersion (a measure of risk)
•a model to link risk and returns
When government
issues the bond its
guaranteed.
As an investor Rf is a
minimum.
- Return
- Risk
- Relationship
between risk
and return
, Covariance links variation
of risk (direction of the
return). Relation between
of two returns.
Corelation (-1;1)
Direct approach
Standard deviation
Rf= 3%
(Rm-Rf) = 6%
𝛽𝑋𝑌𝑍 = 1,25
Requity = 10,5%
When company is 100%
shares, 0 debt cost of
equity= cost of capital
When mix WACC is
needed, and it’s gonna be
average cost of capital
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