PHYSICS 102 Lecture Notes - Lecture 16: Capital Asset Pricing Model, Net Present Value, Capital Structure
Document Summary
Chapter 13: capital budgeting: estimating cash flows and analysing risk. 3 types of risk considered in capital budgeting analysis: stand-alone risk, within-firm risk, and market risk. Well-diversified managers should only be concerned with market risks. But if capm does not operate as theory says more weight than suggested on stand- alone and within risk. Best we can do in practice: estimate project risk in a somewhat nebulous, relative sense. 13. 9- incorporating project risk into capital budgeting capital structure first step towards incorporating risk into capital budgeting decisions (but limited bc only market risk) Firms calculate a cost of capital for each division based on division"s market risk and. Assess firm"s corporate risk based on its portfolio of projects (helps identify projects. 2 methods to incorporate project risk in capital budgeting: specifying exactly how much higher/lower) that significantly increase corporate risk)
