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FNCE3000 Corporate Finance

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FNCE3000 Corporate Finance

0 Download2 Pages / 254 Words

Course Code: FNCE3000
University: Curtin University

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

lf the market risk premium is 8 percent, then according to the CApM, the risk premium of a stock with beta value of 1.7 m.
Interest rate risk
greater than 12 percent
Risk premium of stock = beta * market risk premium
= 1.7*8% = 13.60%


Operating cash flow = Revenue – variable costs – depreciation
=43-30-3 =  $10It looks at different but consistent combinations of variables.it can help identify the project’s most important variables.
higher than the one calculated using accounting profit.
the present value of inflows line cuts the present value of outflows line.
Step l: Modeling the project, Step 2: Specifying probabilities, Step 3: Simulating cash flows. and Step 4: Calculating present value.
timing options.
The net present value method
Discounted payback period, net present value (NPV),and internal rate of retum only
10 percent
=0.5*16%+0.5*4% = 10%
below the security market line.


Rate of return of stock = Beta(Rf-Rm) =0.9*(14%-4%) = 9%
Rate of return on stock is 9% and expected rate of return is 13%, hence the stock is underpriced 

15.0 percent

=8*1.25%+5% = 15%  

$401 .90

Required rate of return = 4%+1.2*(14%-4%) = 16%
Certainty equivalent cash flow = (500*1.04^2)/(1.16^2) =  $ 401.90 

IRR is conceptually easy to communicate. 

Machine B, because EAC for machine B is $79.42


Machine A

Machine B

Intial Costs



Life (years)



Annual Maintenance



Discount rate



PV of annual maintenance



Total cost






Equivalent Annual Cost



Unique risk.

– 1.0


Cov(Rs,Rm) = (0.6*20*30) = 360
Var(Rm) = 20^2 = 400
Beta = [Cov(Rs,Rm)/var(Rm)] = 360/400 = 0.90 

prefer B to A 

capital market line 

When capital rationing exists 

short-term assets and short-term liabilities. 

The expected risk premium on an investment is proportional to its beta 

the cost of capital

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