EXample- Underpriced Asset DATA D s0.20 11% g 70 R F 5 s2.05 b 1.3
Example - Underpriced Asset DATA: D0 = $0.20 km = 11% g = 4% RF = 5% Ps = $2.05 b = 1.3
Solution 0.1414or14.14 12.8 ask>k UNDERPRICED
Solution ks = 0.1414 or 14.14% kj = 12.8% As ks > kj , UNDERPRICED
CAPM the Cost of Capital CAPM is one approach for determining the required rate of return or discount rate k=R+b,×(kmR
CAPM & the Cost of Capital CAPM is one approach for determining the required rate of return or discount rate. k = R + b (k -R ) j F j m F
Business vs Financial risk SML equation represents the business isk for a company that is funded entirely from equity sources(no debt ki also called the cost of equity capital o Use of debt introduces financial risk o Adjust beta to reflect both the company's business and financial risk
Business vs Financial Risk • SML equation represents the business risk for a company that is funded entirely from equity sources (no debt). • kj also called the cost of equity capital. • Use of debt introduces financial risk. • Adjust beta to reflect both the company’s business and financial risk