FINA1003 / FINA1310 CORPORATE FINANCE

Faculty of Business and Economics

University of Hong Kong

Dr. Shiyang HUANG

Lecture 7: Risk and Return

Course Overview
• Introduction

• Part I: Valuation
• Time Value of Money, Discounted Cash Flow Valuation,
Bond and Stock Valuation.

• Part II: Risk and Return

• Historical Risk and Return Relationships, CAPM.

• Part III: Capital Budgeting

• Real Investment Decisions, Cost of Capital.

• Part IV: Financing Decisions

• Raising Capital, Tradeoff between Equity and Debt.
Top 10 Investment Bank Interview Questions
• How do you calculate the cost of equity?

• Answer: There are several competing models for estimating

the cost of equity, however, the capital asset pricing model
(CAPM) is predominantly used on the street. The CAPM
links the expected return of a security to its sensitivity the
overall market basket (often proxied using the S&P
500). The formula is:

Cost of equity (re)

= Risk free rate (rf) + β x Market risk premium (rm-rf )
Key Takeaways
• An Alternative Way to Calculate
Portfolio Mean and Variance
• Portfolio Diversification
• Returns, Expected Returns, and Surprises
• Systematic and Unsystematic Risk
• Systematic Risk and Beta
• Security Market Line

Reading Chapter13
Summary of Chapter 12
n
• Expected return: E ( R ) = ∑ pi Ri
i =1

n
• Variance: σ = ∑ pi ( Ri − E ( R)) 2
2

i =1

where pi = probability of state i occurring

Ri = return when state i occurs

• The expected return of a portfolio is the weighted

average of the expected returns of the respective assets
in the portfolio
• Portfolio diversification is the investment in several
different asset classes or sectors
Portfolio Theory
Portfolio Variance – Special Case of Two Securities
𝑅𝑅𝑝𝑝 = 𝑤𝑤𝑎𝑎 𝑅𝑅𝑎𝑎 + 𝑤𝑤𝑏𝑏 𝑅𝑅𝑏𝑏

𝑬𝑬 𝑹𝑹𝒑𝒑 = 𝑤𝑤𝑎𝑎 𝜇𝜇𝑎𝑎 + 𝑤𝑤𝑏𝑏 𝜇𝜇𝑏𝑏

𝑽𝑽𝑽𝑽𝑽𝑽 𝑹𝑹𝒑𝒑 = 𝑤𝑤𝑎𝑎2 𝜎𝜎𝑎𝑎2 + 𝑤𝑤𝑏𝑏2 𝜎𝜎𝑏𝑏2 + 2𝑤𝑤𝑎𝑎 𝑤𝑤𝑏𝑏 𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑎𝑎 , 𝑅𝑅𝑏𝑏

𝑛𝑛
Recall 𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑎𝑎 , 𝑅𝑅𝑏𝑏 = Σ𝑖𝑖=1 𝑝𝑝𝑖𝑖 𝑟𝑟𝑎𝑎,𝑖𝑖 − 𝜇𝜇𝐴𝐴 𝑟𝑟𝑏𝑏,𝑖𝑖 − 𝜇𝜇𝐵𝐵

• Positive Correlation Increases Variance

• Negative Correlation Decreases Variance
(Diversification)
An Example of Portfolio Theory

• Stock A and Stock B have the following probability

distribution of possible outcomes
• Compute the following:
• Expected Return of A: 𝜇𝜇𝐴𝐴
• Expected Return of B: 𝜇𝜇𝐵𝐵
• Variance and Standard Deviation of A and B: 𝜎𝜎𝐴𝐴2 , 𝜎𝜎𝐴𝐴 , 𝜎𝜎𝐵𝐵2 , 𝜎𝜎𝐵𝐵
Example - Expected Return

• Expected Return of A:
3
• 𝜇𝜇𝐴𝐴 = Σ𝑛𝑛=1 𝑝𝑝𝑛𝑛 𝑟𝑟𝐴𝐴,𝑛𝑛 = 0.3 10% + 0.5 14% + 0.2 20% = 14%

• Expected Return of B:
3
• 𝜇𝜇𝐵𝐵 = Σ𝑛𝑛=1 𝑝𝑝𝑛𝑛 𝑟𝑟𝐵𝐵,𝑛𝑛 = 0.3 35% + 0.5 20% + 0.2 10% = 22.5%
Example – Variance
• Variance of A
• σ2 = .3(10%-14%)2 + .5(14%-14%)2 + .2(20%-14%)2
=0.12%

• Standard Deviation of A
• σ = 3.46%

• Variance of B
• σ2 = .3(35%-22.5%)2 + .5(20%-22.5%)2 + .2(10%-22.5%)2
=0.81%

• Standard Deviation of B
• σ = 9.01%
Example – Covariance and Correlation

• Covariance of A and B
3
• 𝜎𝜎𝐴𝐴𝐴𝐴 = Σ𝑛𝑛=1 𝑝𝑝𝑛𝑛 𝑟𝑟𝐴𝐴,𝑛𝑛 − 𝜇𝜇𝐴𝐴
𝑟𝑟𝐵𝐵,𝑛𝑛 − 𝜇𝜇𝐵𝐵
= 0.3 0.1 − 0.14 0.35 − 0.225 + 0.5 0.14 − 0.14 0.2 − 0.225
+ 0.2 0.2 − 0.14 0.1 − 0.225 = −0.003

Recall:
𝑛𝑛
𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑎𝑎 , 𝑅𝑅𝑏𝑏 = Σ𝑖𝑖=1 𝑝𝑝𝑖𝑖 𝑟𝑟𝑎𝑎,𝑖𝑖 − 𝜇𝜇𝐴𝐴 𝑟𝑟𝑏𝑏,𝑖𝑖 − 𝜇𝜇𝐵𝐵
Example – Portfolio’s Expected Return and Variance
• If we invest 50% on stock A and 50% on stock B, what is
portfolio’s expected return and return variance?

• Portfolio’s expected return

𝜇𝜇𝑃𝑃 = 0.5 ∗ 14% + 0.5 ∗22.5%=18.25%
• Portfolio’s return variance
𝑽𝑽𝑽𝑽𝑽𝑽 𝑹𝑹𝒑𝒑 =0.12%*0.25+0.81%*0.25−0.3%*2*0.25=0.083%

𝑽𝑽𝑽𝑽𝑽𝑽 𝑹𝑹𝒑𝒑 = 𝑤𝑤𝑎𝑎2 𝜎𝜎𝑎𝑎2 + 𝑤𝑤𝑏𝑏2 𝜎𝜎𝑏𝑏2 + 2𝑤𝑤𝑎𝑎 𝑤𝑤𝑏𝑏 𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑎𝑎 , 𝑅𝑅𝑏𝑏

• Standard deviation of Portfolio’s return

σp=2.88%
Key Takeaways
• An Alternative Way to Calculate
Portfolio Mean and Variance
• Portfolio Diversification
• Returns, Expected Returns, and Surprises
• Systematic and Unsystematic Risk
• Systematic Risk and Beta
• Security Market Line

Reading : Chapters 12, 13

The Principle of Diversification

Diversification can substantially reduce the variability of

returns without an equivalent reduction in expected returns
This reduction in risk arises because worse than expected
returns from one asset are offset by better than expected returns
from another
Diversification

Don’t put all your eggs in one basket!

Diversification
• Portfolio diversification is the investment in
several different asset classes or industries
• Diversification is not just holding a lot of assets
• For example, if you own 50 Internet stocks, you
are not diversified
• However, if you own 50 stocks that span 20
different industries, then you are diversified
Portfolio Theory – Diversification
• Diversification reduces variability of returns without
an equivalent reduction in expected returns

• This reduction in risk arises because worse than

expected returns from one asset are offset by better
than expected returns from another

• However, there is a minimum level of risk that cannot

be diversified away and that is called
“Undiversifiable Risk”
Key Takeaways
• An Alternative Way to Calculate
Portfolio Mean and Variance
• Portfolio Diversification
• Returns, Expected Returns, and Surprises
• Systematic and Unsystematic Risk
• Systematic Risk and Beta
• Security Market Line

Reading : Chapters 13
 Expected and Unexpected Returns

• Total return
= Expected return + Unexpected return (surprises)

𝑅𝑅𝑖𝑖 = 𝐸𝐸(𝑅𝑅𝑖𝑖 ) + 𝑈𝑈𝑖𝑖

• The surprise has two types

• systematic and unsystematic portions

𝑅𝑅𝑖𝑖 = 𝐸𝐸(𝑅𝑅𝑖𝑖 ) + 𝑚𝑚+∈𝑖𝑖

where m is the systematic portion and ∈𝑖𝑖 is the unsystematic
portion
 Total Risk
• Total risk = systematic risk + unsystematic risk

• The variance of returns of stock 𝑖𝑖 is a measure of total risk

𝑉𝑉𝑉𝑉𝑉𝑉(𝑅𝑅𝑖𝑖 ) = 𝑉𝑉𝑉𝑉𝑉𝑉(𝑈𝑈𝑖𝑖 )
• The decomposition of the total risk is:

𝑉𝑉𝑉𝑉𝑉𝑉(𝑅𝑅𝑖𝑖 ) = 𝑉𝑉𝑉𝑉𝑉𝑉 𝑚𝑚 + 𝑉𝑉𝑉𝑉𝑉𝑉(∈𝑖𝑖 )

where 𝑉𝑉𝑉𝑉𝑉𝑉 𝑚𝑚 is systematic risk
and 𝑉𝑉𝑉𝑉𝑉𝑉(∈𝑖𝑖 ) is unsystematic risk
The Portfolio Risk (Not Required)
• Consider 𝑛𝑛 stocks: stock 1,2 … , 𝑛𝑛
• We construct a portfolio with equal weight on each stock
𝑛𝑛 𝑛𝑛
1 1
𝑅𝑅𝑝𝑝 = � 𝑅𝑅𝑖𝑖 = � [𝐸𝐸(𝑅𝑅𝑖𝑖 ) + 𝑚𝑚+∈𝑖𝑖 ]
𝑛𝑛 𝑛𝑛
𝑖𝑖=1 𝑖𝑖=1
1 1
=∑𝑛𝑛𝑖𝑖=1 𝐸𝐸(𝑅𝑅𝑖𝑖 ) + 𝑚𝑚 + ∑𝑛𝑛𝑖𝑖=1 ∈𝑖𝑖
𝑛𝑛 𝑛𝑛
• The total risk on the portfolio is:
𝑛𝑛
1
𝑉𝑉𝑉𝑉𝑉𝑉(𝑅𝑅𝑝𝑝 ) = 𝑉𝑉𝑉𝑉𝑉𝑉 𝑚𝑚 + 𝑉𝑉𝑉𝑉𝑉𝑉(� ∈)
𝑛𝑛 𝑖𝑖
𝑖𝑖=1
1 1 𝑉𝑉𝑉𝑉𝑉𝑉(∈)
where 𝑉𝑉𝑉𝑉𝑉𝑉 ∑𝑛𝑛𝑖𝑖=1 ∈𝑖𝑖 = ∑𝑛𝑛𝑖𝑖=1 𝑉𝑉𝑉𝑉𝑉𝑉(∈𝑖𝑖 ) = → 0 when n goes to infinity
𝑛𝑛 𝑛𝑛2 𝑛𝑛

(𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑉𝑉𝑉𝑉𝑉𝑉(∈𝑖𝑖 ) = 𝑉𝑉𝑉𝑉𝑉𝑉(∈))
Portfolio Theory – Diversification

Systematic Risk: (a.k.a. Non-Diversifiable Risk or

Market Risk) Risk factors that affect a large number
of assets, e.g. changes in GDP, inflation, interest
rates, etc.

Unsystematic Risk: (a.k.a. Diversifiable Risk or

Idiosyncratic Risk) Risk factors that affect a limited
number of assets, unique and asset-specific, can be
eliminated by combining assets into a portfolio.
Key Takeaways
• An Alternative Way to Calculate
Portfolio Mean and Variance
• Portfolio Diversification
• Returns, Expected Returns, and Surprises
• Systematic and Unsystematic Risk
• Systematic Risk and Beta
• Security Market Line

Reading : Chapters 13
Systematic Risk Principle

• There is a reward for bearing risk (systematic risk)

• There is not a reward for bearing risk unnecessarily

(unsystematic risk)

• The expected return on a risky asset depends only on

that asset’s systematic risk since unsystematic risk
can be diversified away
 Intuition for the CAPM
• In equilibrium, all assets and portfolios must have the
same reward-to-risk ratio and they all must equal the
reward-to-risk ratio for the market
• Question: How to measure systematic risk for one
specific stock or asset?
• Answer: Beta (The amount of systematic risk present
in a particular risky asset relative to that in an average
risky asset)

𝑹𝑹𝒊𝒊 = 𝑹𝑹𝒇𝒇 + 𝜷𝜷𝒊𝒊 𝑹𝑹𝒎𝒎 − 𝑹𝑹𝒇𝒇 + 𝜺𝜺𝒊𝒊

Implications of CAPM
𝑬𝑬 𝑹𝑹𝒊𝒊 = 𝑹𝑹𝒇𝒇 + 𝜷𝜷𝒊𝒊 (𝑬𝑬 𝑹𝑹𝒎𝒎 − 𝑹𝑹𝒇𝒇 )

If 𝛽𝛽𝑖𝑖 = 1, then 𝐸𝐸 𝑅𝑅𝑖𝑖 = 𝐸𝐸[𝑅𝑅𝑚𝑚 ]

If 𝛽𝛽𝑖𝑖 = 0, then 𝐸𝐸 𝑅𝑅𝑖𝑖 = 𝑅𝑅𝑓𝑓

• Beta is the measure of systematic risk; standard deviation

is not!
• Beta measures sensitivity of stock to market movements,
i.e. beta measures systematic risk, not total risk!
Implications of CAPM
• Consider the following information

• Which security has more total risk?

• Which security has more systematic risk?

• Which security should have the higher expected

return?
Example of Application of CAPM
• Using monthly returns from 1990-2001, you estimate
that Microsoft’s beta is 1.5, and its monthly standard
deviation is 18%. If these estimates are reliable guide
going forward, what expected rate of return should
you require for holding Microsoft? Assume 𝑅𝑅𝑓𝑓 = 5%
and market risk premium 𝐸𝐸 𝑅𝑅𝑚𝑚 − 𝑅𝑅𝑓𝑓 is 6%.
Portfolio Beta and Expected Return
Portfolio Beta

𝜷𝜷𝒑𝒑 = 𝒘𝒘𝟏𝟏 𝜷𝜷𝟏𝟏 + 𝒘𝒘𝟐𝟐 𝜷𝜷𝟐𝟐 + ⋯ + 𝒘𝒘𝒏𝒏 𝜷𝜷𝒏𝒏

Therefore,

𝑬𝑬 𝑹𝑹𝒑𝒑 = 𝑹𝑹𝒇𝒇 + 𝜷𝜷𝒑𝒑 (𝑬𝑬 𝑹𝑹𝒎𝒎 − 𝑹𝑹𝒇𝒇 )

Example: Portfolio Betas
• Consider the previous example with the following
four securities
Security Weight Beta
DCLK .133 2.685
KO .2 0.195
INTC .267 2.161
KEI .4 2.434

• What is the portfolio beta?

Example: Portfolio Betas
• Consider the previous example with the following four
securities
Security Weight Beta
DCLK .133 2.685
KO .2 0.195
INTC .267 2.161
KEI .4 2.434

• What is the portfolio beta?

• .133(2.685) + .2(.195) + .267(2.161) + .4(2.434)

= 1.947
Example of Portfolio Beta
• Suppose we know the betas for the following stocks:
(e.g. we can look them up at Yahoo Finance)

Stock Beta Expected Return

GAP 0.48

IBM 0.52

Exxon Mobil 1.14

Google 2.6

• Calculate the expected return for each. Assume the

risk-free rate is 4.5% and the market risk premium is
8.5%.
Example of Portfolio Beta
• Suppose we know the betas for the following stocks:
(e.g. we can look them up at Yahoo Finance)

Stock Beta Expected Return

GAP 0.48 0.0858

IBM 0.52 0.0892

Exxon Mobil 1.14 0.1419

Google 2.6 0.266

• Calculate the expected return for each. Assume the

risk-free rate is 4.5% and the market risk premium is
8.5%.
Example of Portfolio Beta
• Suppose we form a portfolio of these four stocks with
the following weights

Stock Beta Weight

GAP 0.48 0.2
IBM 0.52 0.3
Exxon Mobil 1.14 0.4
Google 2.60 0.1

• What is the portfolio beta?

• What is the expected return of the portfolio?
Example of Portfolio Beta
• Suppose we form a portfolio of these four stocks with the
following weights
Stock Beta Weight
GAP 0.48 0.2
IBM 0.52 0.3
Exxon Mobil 1.14 0.4
Google 2.60 0.1

• What is the portfolio beta?

Answer: 0.48*0.2+0.52*0.3+1.14*0.4+2.60*0.1=0.968
• What is the expected return of the portfolio?
Answer: 4.5%+8.5%*0.968=12.73%
or 0.2*0.0858+0.3*0.0892+0.4*0.1419+0.1*0.266=12.73%
Beta and the Risk Premium
• Remember that the risk premium

= expected return – risk-free rate

• The higher the beta, the greater the risk premium
should be
• Can we define the relationship between the risk
premium and beta so that we can estimate the
expected return?

YES!
Security Market Line
Market Equilibrium

• In equilibrium, all assets and portfolios must have

the same reward-to-risk ratio, and they all must
equal the reward-to-risk ratio for the market

E ( RA ) − R f E ( RM − R f )
=
βA βM
The Capital Asset Pricing Model (CAPM)
From market equilibrium:

E ( RA ) − R f E ( RM − R f ) βA
= ⇒ E ( RA ) = R f + * E ( RM − R f )
βA βM βM
βA
⇒ E ( RA ) = R f + * E ( RM − R f ) = R f + β A * E ( RM − R f )
1

The capital asset pricing model defines the relationship

between risk and return
E(RA) = Rf + βA(E(RM) – Rf)
If we know an asset’s systematic risk, we can use the CAPM
to determine its expected return
This is true whether we are talking about financial assets or
physical assets
Reward-to-Risk Ratio: Definition and Example
• Example: risk-free rate=8%, expected return of asset
A=20%, the asset A has beta 1.6
• The reward-to-risk ratio is the slope of the line illustrated in
the previous example
 Slope = (E(RA) – Rf) / (βA – 0)
 Reward-to-risk ratio for previous example =
(20 – 8) / (1.6 – 0) = 7.5

• What if an asset has a reward-to-risk ratio of 8 (implying that

the asset plots above the line)?
• What if an asset has a reward-to-risk ratio of 7 (implying that
the asset plots below the line)?
Security Market Line
Performance Measurement
• Suppose the three mutual funds below, A, B and C, have
the same average return and the same standard deviation
• Are all three funds equally attractive?
Factors Affecting Expected Return

E(RA) = Rf + βA(E(RM) – Rf)

Rf : risk free return, pure time value of money

E(RM) – Rf: market risk premium, reward for holding

market portfolio
βA: beta, amount of systematic risk in stock A

βA(E(RM) – Rf): risk premium, reward for bearing

systematic risk in stock A
 Example - CAPM
• Consider the betas for each of the assets given
earlier. If the risk-free rate is 4.15% and the market
risk premium is 8.5%, what is the expected return for
each?
Security Beta Expected Return
DCLK 2.685 4.15 + 2.685(8.5) = 26.97%
KO 0.195 4.15 + 0.195(8.5) = 5.81%
INTC 2.161 4.15 + 2.161(8.5) = 22.52%
KEI 2.434 4.15 + 2.434(8.5) = 24.84%
 Implications of CAPM (Not Required)
𝑬𝑬 𝑹𝑹𝒊𝒊 = 𝑹𝑹𝒇𝒇 + 𝜷𝜷𝒊𝒊 (𝑬𝑬 𝑹𝑹𝒎𝒎 − 𝑹𝑹𝒇𝒇 )
=(1-𝜷𝜷𝒊𝒊 ) 𝑹𝑹𝒇𝒇 +𝜷𝜷𝒊𝒊 𝑬𝑬 𝑹𝑹𝒎𝒎
• We can construct a portfolio with only market index and
risk-asset to make the same expected return as 𝑬𝑬 𝑹𝑹𝒊𝒊 , and
with the lower risk,

Var(𝑹𝑹𝒊𝒊 )=𝜷𝜷𝟐𝟐𝒊𝒊 Var(𝑹𝑹𝒎𝒎 )+Var(𝜺𝜺𝒊𝒊 )

• Look at the portfolio putting 𝜷𝜷𝒊𝒊 on market index and 1-𝜷𝜷𝒊𝒊 on risk-
free asset. That is, the portfolio’ return
𝑹𝑹𝒑𝒑 =(1−𝜷𝜷𝒊𝒊 ) 𝑹𝑹𝒇𝒇 +𝜷𝜷𝒊𝒊 𝑹𝑹𝒎𝒎
𝐕𝐕𝐕𝐕𝐕𝐕(𝐑𝐑 𝐩𝐩 )=(1−𝛃𝛃𝐢𝐢 )𝟐𝟐 Var(𝐑𝐑 𝐟𝐟 ) + 𝛃𝛃𝟐𝟐𝐢𝐢 𝐕𝐕𝐕𝐕𝐕𝐕(𝐑𝐑 𝐦𝐦 ) + 𝟐𝟐 (1−𝛃𝛃𝐢𝐢 ) 𝛃𝛃𝐢𝐢 COV(𝐑𝐑 𝐟𝐟 , 𝐑𝐑 𝐦𝐦 )
=𝛃𝛃𝟐𝟐𝐢𝐢 𝐕𝐕𝐕𝐕𝐕𝐕(𝐑𝐑 𝐦𝐦 )
Comprehensive Problem 1 (Complicated One)
Your investment portfolio consists of $15,000 invested in only
one stock-Microsoft. Suppose the risk-free rate is 5%, Microsoft
stock has an expected return of 12% and a volatility of 40%, and
the market portfolio has an expected return of 10% and volatility
of 18%. Under the CAPM assumptions
What alternative investment has the lowest possible
 Q(1):
volatility while having the same expected return as Microsoft?
Q(2):What is the volatility of the portfolio in Part (1)?
 Comprehensive Problem 1 (Answer)
 Answer:

Tips: The portfolio with lowest volatilities (given the same expected return) only includes the systematic risk. Thus,
the portfolio is a portfolio with only market portfolio and risk-free asset (it is clear that this kinds of portfolio has only
systematic risk).

We assume we put x weight on market portfolio and 1-x on risk free asset. This portfolio’s expected return is

x*10%+(1-x)*5%

In this question, we want to make sure this portfolio’s return is 12%, which Microsoft’s return. Thus,

x*10%+(1-x)*5%=12% ->>>>> x=1.4 and 1-x=-0.4

This means that the portfolio with the lowest volatility that has the same return as Microsoft has 15,000*1.4=21,000
in the market portfolio and borrows 21,000-15,000=6,000, that is -6,000 in the risk-free asset.

Check this portfolio’s variance and SD.

Portfolio Variance=𝜎𝜎𝑝𝑝2 = 𝑥𝑥 2 𝜎𝜎12 + 1 − 𝑥𝑥 2𝜎𝜎22 + 2𝑥𝑥(1 − 𝑥𝑥) 𝑐𝑐𝑐𝑐𝑐𝑐(𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟, 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟)

Thus, 𝜎𝜎𝑝𝑝2 = 1.42(0.18)2+(-0.4)2(0)2+2*1.4*(-0.4)*(0.18)*0*0

=0.0635

Sd=0.252 (it is clear Sd of this portfolio is lower than Microsoft’s volatility)

Figure 13.4
Course Overview
• Introduction

• Part I: Valuation
• Time Value of Money, Discounted Cash Flow Valuation,
Bond and Stock Valuation.

• Part II: Risk and Return

• Historical Risk and Return Relationships, CAPM.

• Part III: Capital Budgeting

• Real Investment Decisions, Cost of Capital.

• Part IV: Financing Decisions

• Raising Capital, Tradeoff between Equity and Debt.