1. Risk, Cost of Capital, and Capital Budgeting

4. 12.1 The Cost of Equity Capital Invest in project Firm with excess cash Shareholder’s Terminal Value Pay cash dividend Shareholder invests in financial asset Because stockholders can reinvest the dividend in risky financial assets, the expected return on a capital-budgeting project should be at least as great as the expected return on a financial asset of comparable risk. A firm with excess cash can either pay a dividend or make a capital investment

8. Real-World Betas

15. Operating Leverage Sales $ Fixed costs Total costs  EBIT  Sales Operating leverage increases as fixed costs rise and variable costs fall. Fixed costs Total costs

34. Liquidity and the Cost of Capital Cost of Capital Liquidity An increase in liquidity ( i.e ., a reduction in trading costs) lowers a firm’s cost of capital.

41. DOL = = = DFL = = DTL = = = (=DOL*DFL) 14 15 △ EBIT / EBIT △ Q / Q Q(P–V) Q(P–V) –F S–VC S –VC –F △ EPS / EPS △ EBIT / EBIT EBIT EBIT –I △ EPS / EPS △ Q / Q Q(P–V) Q(P–V) –F –I S–VC S–VC –F –I