Chapter 13.

Capital budgeting Is about investment

Risk Averse- For a given situation, they would decisions and the value they create.
prefer relative certainty to uncertainty. The AVERAGE ACCOUNTING RETURN
wider, the more risk.
Dividend Valuation
Internally Generated – RE PAYBACK PERIOD
Time required to recoup the initial
investment.
NET PRESENT VALUE
The greater the standard deviation, the greater Externally Generated – new common Discounts the cash inflows
INTERNAL RATE OF RETURN
the risk. Get it when working on NPV
The larger the coefficient of variation, the greater the PROFITABILITY INDEX

Capital Asset Pricing Model MODIFIED IRR

Internally Generated Reinvested at cost of capital
NPV PROFILE

Externally Generated

risk .
The project that carries a normal amount of risk
should be discounted at the firm’s cost of capital.

Appendix 11A
CAPM relates the risk-return tradeoffs of
individual assets to market returns.
Risk also increases over time. The certainty
equivalent approach adjusts each cash flow THE SECURITY MARKET LINE
according to its probability distribution to a value
that is equal on the basis of having no inherent risk
and is therefore certain.

PV OF CCA TAX SHIELD

reiD
eC
APPENDIX 11B M. KK
sjbcsks
The efficient frontier graphically represents
portfolios that maximize returns for the risk
assumed.

CHAPTER 11

CHAPTER 12