Capital Budgeting & Risk.ppt

Capital Budgeting & Risk.pptCapital Budgeting & RiskInvest in highest NPV projectNeed Discount rate to get NPVCapital Budgeting & RiskInvest in highest NPV projectNeed Discount rate to get NPVUse CAPM to get discount rateCapital Budgeting & RiskInvest in highest NPV projectNeed Discount rate to get NPVUse CAPM to get discount rateModify CAPM (account for proper risk)Capital Budgeting & Risk Modify CAPM (account for proper risk)? Use COC unique to project, rather pany COC? Take into account Capital pany Cost of Capitalsimple pany Cost of Capital (COC) is based on the average beta of the assetsThe average Beta of the assets is based on the % of funds in each pany Cost of Capitalsimple pany Cost of Capital (COC) is based on the average beta of the assetsThe average Beta of the assets is based on the % of funds in each assetExample1/3 New Ventures B= Expand existing business B= Plant efficiency B= B of assets = ?Capital Structure - the mix of debt & equity within pany?Expand CAPM to include CS R = rf + B ( rm - rf )esRequity = rf + B ( rm - rf ) Capital StructureCapital StructureCOC =rportfolio= rassetsCapital StructureCOC =rportfolio = rassetsrassets= = rdebt (D) + requity (E) (V) (V)COC =rportfolio = rassetsrassets= = rdebt (D) + requity (E) (V) (V) Bassets = Bdebt (D) + Bequity (E) (V) (V)Capital Structure