MAF203 Lecture Notes - Lecture 9: Capital Asset Pricing Model, Models 1, Issued Shares
Document Summary
Cost of capital: return that the company has to pay the providers back on. It is the rate of return that the shareholders and lenders require in order to be compensated for the risk of investing in a company. Cost of capital = required rate of return. Value of firm = sum of pv discounted at the cost of capital (cid:2194)(cid:2203)(cid:2187) (cid:2197)(cid:2188) (cid:2200)(cid:2195) (cid:4666)(cid:4667)=(cid:2777)+ . The risk of the cash flows/assets used to service the capital will be determined by the nature of the assets. Required rate of return is determined by the risk of the project. Value of the project depends on what the project is, not who the investor is. Capital is used to finance investments in real assets. These real assets in turn generate the cash flows used to service the capital. The risk of the cash flows/ real assets used to service the capital will be determined by the nature of the real assets.