RISK AND RETURN

Risk and Return of Single Asset

Expected Retun
Year F G H
2013 0.16 0.17 0.14
2014 0.17 0.16 0.15
2015 0.18 0.15 0.16
2016 0.19 0.14 0.17
Expected Return
Standard Deviation

Risk and Return of Portfolio

Expected Return

Portfolio W(F) W(G) W(H)

Alt 1 1.00
Alt 2 0.50 0.50
Alt 3 0.50 0.5

Risk Alt 1
Portfolio Risk

Risk Alt 2
Coefficient of Correlation (0.75)
w1s1 w2s2
w1s1
w2s2
Variance
Standard Deviation

Risk Alt 3
Coefficient of Correlation 0.75
w1s1 w2s2
w1s1
w2s2
Variance
Standard Deviation
Coefficient of Variation

Alt 1
Alt 2
Alt 3
Expected Return
THE COST OF CAPITAL

Cost of Debt

Par Value 1,000.00

Price 1,150.00
Coupon Rate 8.00% per annum
Maturity 20.00 years

Using Bond IRR

Cash Flows
Time Cash Flow Type
Coupon
Year 0 Buy Bonds
Year 1 Coupon Payment
Year 2 Coupon Payment
Year 3 Coupon Payment
Year 4 Coupon Payment
Year 5 Coupon Payment
Year 6 Coupon Payment
Year 7 Coupon Payment
Year 8 Coupon Payment
Year 9 Coupon Payment
Year 10 Coupon Payment
Year 11 Coupon Payment
Year 12 Coupon Payment
Year 13 Coupon Payment
Year 14 Coupon Payment
Year 15 Coupon Payment
Year 16 Coupon Payment
Year 17 Coupon Payment
Year 18 Coupon Payment
Year 19 Coupon Payment
Year 20 Coupon & Principal Payment
Yield to Maturity (Bond IRR)

Using Formula

Settlement Purchase Date

Maturity Maturity Date
Rate
Price
Redemption
Frequency
YTM

After-Tax Cost of Debt

Tax Rate 34.00%

Aftex-tax Cost of Debt

Preferred Stock

Par Value 100.00

Dividend 7.00%
Price 85.00
Cost of Preferred Stock

Common Stock

Price 25.00
Current Dividend 1.00
Dividend Growth 5.00%
Cost of Common Stock

Weighted Average Cost of Capital

Using Current Market Value

Outstanding Market Price

Debt
Preferred Stock
Common Stock

Using Target Market Value

Target Market Value Weight

Debt
Preferred Stock
Common Stock
Cash Flows
Total Cash Flow
Principal
Market Value Weight Cost Weighted Cost

WACC

Cost Weighted Cost

WACC