Beruflich Dokumente
Kultur Dokumente
Systematic Risk = am m2
r rate of return Po price today D1 any dividends received E(P1) P0 change in price
Functions of Variables f = a*X E(f) = a*E(x) f2 = a2*x2 f = a*x Variance x2 = E(X2)-E(X)2 = E(X-Xexp)2 = (x-xexp)Pr(x)
x2 = variance Xexp = expected value of X Pr(X) = probability of X
Expected return according to market activity. Use CML to find best weight of portfolio mixed with market for higher return & lower .
r 1 higher = buyer P
If r < E(r) compared with , overpriced, sell. If r > E(r), underpriced, buy.
WACC =
Profitability Index
PV of future revenues PV of future costs If >1.00, accept. Good for capital rationing with limited cash.
Correlation xy = xy xy
V = total value of firm D = total debt rd = cost of debt = yield to maturity Ep = total preferred shares rp = required preferred return Ec = total common shares rc = required share return (find with stock price & dividends) Apply WACC to new projects
Payback Method
# years until initial costs are covered *if recovered part-way through year, use fraction of that years total revenue If > cutoff (set internally), than accept. Easy to understand. Ignores time value of money. Ignores future cash flows.