Chapter 11

Expected Return Prob. * Return

Portfolio (Ra*Wa)+(Rb*Wb)

Variance 1/n (Ra-E(R))2 + (Rb-E(R))2

Portfolio (Wa*σa)2 +(Wb*σb)2+2*(Wa*σa)*(Wb*σb)ρab p from -1.0 to +1.0 If p = +1.0, no risk reduction is possible
If p = –1.0, complete risk reduction is possible

Covariance (Ra-E(R)) * Prob. from -∞ to +∞ negative is better

Correlation Cov (a,b) / σa*σb from -1 to +1 negative is better

Return (R ) R+U
Regression Model Ri = αi + βiRm+ ei
Retrun on Market (Rm) Rf + Market Risk Premium(Rm-Rf)

Beta Cov (Ri, Rm) / σ2m >1 more voitaile e.g.: technology
>1 less voiltaile e.g.: food

CAPM Rf + βi(Rm-Rf)

Chapter 13

Cost of Equity/Expected Return Rf + βi(Rm-Rf)

Company's βi σ i,m / σ2m
Market Risk Premium - DDM (D1/p) + g

βAssets (D/ D+E * βDebt) + (E/ D+E * βEquity) F. Leverage increases βEquity compared to βAssets

Cost of Debt Interest rate/yeild to maturity adjusted for tax

Cost of Preferred Stocks RP = C / PV Not tax deductible

RWACC (S/(B+P+S))RS + (P/(B+P+S))RP + (B/(B+P+S))RD(1-TC)

New cost of a project Amount Raised = Necessary Proceeds / (1-% flotation cost)

fo (E/V)* fE + (D/V)* fD
1.Use Rwacc to get PVs, then initial NPV
To calculate the NPV for a project 2.Calculate fo, then total costs
considering floating costs 3.Calculate new NPV

Chapter 14

Abnormal Return (AR) R - RM

Chapter 16

MM Proposition I VL = VU W/o taxes

VL = VU + T *B T * B replace the PV of interst tax sheild w/ taxes
VU = EBIT * (1-T) / R0
RWACC (leveraged firm) (S/(B+S))RS + (B/(B+P+S))RD Share price when debt to be used to repurchase and we have 2 plans

MM Proposition II Rs=R0 + B/S × (R0 -RB) W/o taxes

Rs=R0 + B/S * (1-T)* (R0 -RB) w/ taxes
RWACC (leveraged firm) (S/(B+S))RS + (B/(B+S))RD*(1-tax)

Interest Tax Sheild T * RB * B

Chapter 19

Common Stocks no. of shares * par value

Surplus Account old surplus + increase in no. of shares * (price-par)

Retained Earnings Old RE - change in common stocks - change in surplus account