risk and the cost of capital

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1、confirmingpagesPART2"""""CHAPTERRISK9RiskandtheCostofCapital!LongbeforethedevelopmentofmoderntheoriesWeexplainedtheCAPMinthelastchapter,butlinkingriskandreturn,smartfinancialmanagersdidn’tshowyouhowtoestimatebetas.Youcan’tlookadjustedforriskincapitalbudgeti

2、ng.Theyknewthatupbetasinanewspaperorseethemclearlybytrackingriskyprojectsare,otherthingsequal,lessvaluableafewday-to-daychangesinstockprice.Butyoucanthansafeones—thatisjustcommonsense.Thereforegetusefulstatisticalestimatesfromthehistoryofstocktheydemandedhi

3、gherratesofreturnfromriskyandmarketreturns.projects,ortheybasedtheirdecisionsaboutriskyNowsupposeyou’reresponsibleforaspecificprojectsonconservativeforecastsofprojectcashinvestmentproject.Howdoyouknowiftheprojectisflows.averageriskorabove-orbelow-averageris

4、k?WesuggestTodaymostcompaniesstartwiththecompanycostyoucheckwhethertheproject’scashflowsaremoreorlessofcapitalasabenchmarkrisk-adjusteddiscountratesensitivetothebusinesscyclethantheaverageproject.fornewinvestments.ThecompanycostofcapitalisAlsocheckwhetherth

5、eprojecthashigherorlowerfixedtherightdiscountrateonlyforinvestmentsthathaveoperatingcosts(higherorloweroperatingleverage)andthesameriskasthecompany’soverallbusiness.Forwhetheritrequireslargefutureinvestments.riskierprojectstheopportunitycostofcapitalisgreat

6、erRememberthataproject’scostofcapitaldependsthanthecompanycostofcapital.Forsaferprojectsitonlyonmarketrisk.Diversifiableriskcanaffectprojectisless.cashflowsbutdoesnotincreasethecostofcapital.ThecompanycostofcapitalisusuallyestimatedAlsodon’tbetemptedtoaddar

7、bitraryfudgefactorsasaweighted-averagecostofcapital,thatis,astodiscountrates.Fudgefactorsaretoooftenaddedtheaveragerateofreturndemandedbyinvestorsintodiscountratesforprojectsinunstablepartsofthethecompany’sdebtandequity.Thehardestpartofworld,forexample.esti

8、matingtheweighted-averagecostofcapitalisRiskvariesfromprojecttoproject.Riskcanalsofiguringoutthecostofequity,thatis,theexpectedratevaryovertimeforagivenproject.Forexample,someofreturntoinvestorsinthefi