Professional Documents
Culture Documents
rD = I + (F – P0)/n
0.6P0 + 0.4F
Centre for Financial Management , Bangalore
ILLUSTRATION
yield.
Approximate yield :
11 + (100 – 95) / 5
= 12.37 percent
0.6 x 95 + 0.4 x 100
Illustration
Rf = 7%, E = 1.2, E(RM) = 15%
rE = 7 + 1.2 [15 – 7] = 16.6%
Centre for Financial Management , Bangalore
INPUTS FOR THE SML
While there is disagreement among finance practitioners, the
following would serve.
• The risk-free rate may be estimated as the yield on long-
Yield on the
Cost of = + Risk
long-term bonds
equity premium
of the firm
TFj
BPj =
wj
where BPj is the breaking point on account of financing source
j, TFj is the total new financing from source j at the breaking
point, and wj is the proportion of financing source j in the
capital structure.
16 C
15 14.6%
14 14.0%
13.2% D
13
E
12 Marginal Cost of Capital Curve
11
10 Optimal Capital Budget