Risk and Cost of Capital

Question 1

Discount rate for a project

Answer 1

Reflects risk of projects CFs going FORWARD

Question 2

Project risk no = av. firm risk

Answer 2

COC +-x
or
Look for proxy

Question 3

Project risk = av. firm risk

Answer 3

CoC

Question 4

WACC

Answer 4

(1-t)·Rd·(D/V) + Re·(E/V)

Question 5

Notes on WACC

Answer 5

Use market values instead of book values when possible

Question 6

Re

Answer 6

CAPM

Question 7

Rd

Answer 7

YTM on bonds
Se hace: TIR todos los pagos

Question 8

Notas Rd

Answer 8

Si cada x meses -> pago/x
PV -vo
Future Value = Book Face Value

Question 9

Pure Plays

Answer 9

Publicly traded company with narrow focus on project similar to ours (use as proxy)

Question 10

Notes on pps

Answer 10

Don’t have to put 100% of weight on 1 pp (better not actually)

Question 11

Be

Answer 11

Business Risk + Financial Risk

Question 12

Ba

Answer 12

Business Risk
(eliminated financial risk as funding choices not taken into account)

Question 13

De pp a project

Answer 13

1. Obtain Ba pp (unlevered B)
2. Obtain Be project (levered B)

Question 14

Higher Ba for firms with

Answer 14

Higher cycliality
High Operating Leverage (FC)
Longer Asset Maturity (LT assets/projects)

Question 15

Firms with multiple lines of Business

Answer 15

Ba weighted sum of Ba of different business lines
Then Be and COC