Required Rate Of Return• K = Rs = RFR + B ( MRP )• K = Rs : Required Rate Of Return• RFR : Risk Free Rate ( T- bond )• B : Beta = sensitivity to movements in the relevant market
Required Rate Of Return• Assume the company has a beta coefficient of 1.2, that the risk-free rate (the yield on T- bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firm’s stock? 7 % + 1.2 (5 %) = 13 %
Debt• (Debt Instrument ) Companies Issuing Bonds to Borrow money from investors and promised to pay it back at a certain rate of interest.• Example : – Interest At Maturity ( Deposits ) – Amortized Cash Flow ( Cars ) – Bond Time Line – Fixed and Floating
Debt• Rating Agency : Moodys , S&P : – The Rating Reflect The Credit Worthiness of the Issuer .
Risk Management• Risk is The uncertainty that an investment will earn its expected rate of return .• Types Of Risk : – Country Risk ( Political ) , Business Risk . Financial Risk ( Leverage ) , Liquidity Risk & Exchange Rate Risk .
Risk Management• Relationship between risk and return