Lecture 7 - Valuation and budgeting for the levered firm pt.2 Flashcards
1
Q
Why is Rs different for firms that have similar Ro?
A
Ro = operating risk so firms in same market e.g supermarkets have similar
But Rs incorporates the operating risk so if leverage is higher in one firm then will be different
2
Q
CAPM
A
Capital asset pricing model
Expected return = Risk free rate + Beta x ( Executed return on market - Risk free rate)
3
Q
Market risk premium
A
Rm - Rf
Difference between expected return on market and risk free rate
4
Q
Two types of risk
A
Systematic
Unsystematic
5
Q
Systematic risk
A
Non diversifiable risk or market risk
6
Q
Unsystematic Risk
A
Diversifiable risk, unique risk, asset specific risk
7
Q
Capital budgeting steps when the discount rate must be estimated
A
- Determine Cost of leveraged equity capital
- Determine hypothetical all equity cost of capital
- Determine Rs for venture
- Determine Rwacc for venture
8
Q
A
