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    Exam 2 Equations

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    Fatma Sulaiman
    The document discusses concepts related to risk and return including market risk, systematic risk, variance, expected return, and the capital asset pricing model. It also covers cost of equity, cost of debt, weighted average cost of capital, and financial ratios such as degree of operating leverage and degree of financial leverage. Key models presented include the security market line, dividend discount model to calculate cost of equity, and valuation of bonds.

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    Exam 2 Equations

    Uploaded by

    Fatma Sulaiman
    17 views1 page
    The document discusses concepts related to risk and return including market risk, systematic risk, variance, expected return, and the capital asset pricing model. It also covers cost of equity, cost of debt, weighted average cost of capital, and financial ratios such as degree of operating leverage and degree of financial leverage. Key models presented include the security market line, dividend discount model to calculate cost of equity, and valuation of bonds.

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    The document discusses concepts related to risk and return including market risk, systematic risk, variance, expected return, and the capital asset pricing model. It also covers cost of equity, cost of debt, weighted average cost of capital, and financial ratios such as degree of operating leverage and degree of financial leverage. Key models presented include the security market line, dividend discount model to calculate cost of equity, and valuation of bonds.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    17 views1 page

    Exam 2 Equations

    Uploaded by

    Fatma Sulaiman
    The document discusses concepts related to risk and return including market risk, systematic risk, variance, expected return, and the capital asset pricing model. It also covers cost of equity, cost of debt, weighted average cost of capital, and financial ratios such as degree of operating leverage and degree of financial leverage. Key models presented include the security market line, dividend discount model to calculate cost of equity, and valuation of bonds.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 1

    Chapter 10:

    Ri: security risk RM: Market risk


    RM: Market risk Ri: security risk (expected)
    σ2: variance β: systematic risk
    β: systematic risk R f: risk free rate
    E(Ri): expected return Alpha = RActual Return - (RF + β * (RM - RF))= RActual Return- Ri

    Chapter 11:
    R: Total return R: Total return
    Ṝ: Expected return Ṝ: Expected return
    U: Unexpected return m: systematic risk
    ε: unsystematic risk
    Ri=RF + β *F , F=Ri-RF / β

    No arbitrage (mutli-factor)
    Fx=Actual – Expected risk factor Ri=RF + β1 *F1+ β2 *F2 . . . . Fx: Risk factor
    ε: unsystematic risk
    βx: systematic risk APT Model single factor
    R: Total return Ri= β* F +RF
    S2 = σ2 * β2 S2: variance of return ; s:standard deviation 1
    σ2: variance of the factor ; σ: standard deviation σ2(ep)= σ2(ei) ,
    n
    ; β: systematic risk ei: individual
    ep: portfolio
    Chapter 12:
    A) Cost of Equity B) Cost of debt
    P0 = D1/ (RE - g) ; Present Value of level coupon bond :
    P0: Current price ; D1: dividend year end; RE: cost of equity T ¯
    Value
    Rearrange :
    PV =C∗A R +
    (1+ R)T
    RE =( D1/ P0 )+ g and D1 = D0(1 + g)
    PV= (Coupon PV + face value PV)
    R: discount rate ; T:time ; F:face value

    [ ]
    1
    1−
    T
    A is the PV annuity factor: A =
    R
    T
    R (1+ R)T
    R
    A ) Cost of Equity C) cost of preferred stock
    RM: Market risk RP = D / P0
    Ri: security risk P0: Current price ; D: annual dividend
    (expected)
    β: systematic risk
    R f: risk free rate
    E = market value of equity = # shares x price per share After-tax cost of debt = RD × (1 – TC)
    D = market value of debt = # outstanding bonds x bond price
    V = market value of the firm = D + E WACC = (E/V) × RE + (D/V) × RD × (1 – TC)
    Weights: RD: return on debt
    E/V = percent financed with equity RE: return on equity
    D/V = percent financed with debt

    Chapter 13
    Indifference point for EPS:

    CM
    DOL = %Δ Income / %Δ Sales or DOL= Pt = Pt-1 + Expected Return + Random errors
    EBIT ..
    abnormal return= actual return – β *market return
    DFL= %Δ EPS / %Δ EBIT or OI

    DCL or DTL = DOL x DFL = %Δ EPS / %Δ Sales

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