【正文】 rage of the expected return on a pany’s stock and the interest rate that it pays for debt ?Can depend on level of nondiversifiable risk 169。2020 Pearson Education, Inc. Chapter 15 58 Adjustments for Risk ?The asset beta, ?, measures the sensitivity of an asset’s return to market movements and, therefore, the asset’s nondiversifiable risk ?1% rise in market resulting in a 2% rise in asset price means the beta is 2 ?1% rise in market resulting in a 1% rise in asset price means beta is 1 ?The larger the beta, the greater the expected return on the asset 169。2020 Pearson Education, Inc. Chapter 15 56 Capital Asset Pricing Model ?Suppose you invest in the entire stock market (mutual fund) ?rm = expected return of the stock market ?rf = risk free rate ?rm rf = risk premium for nondiversifiable risk ?Additional expected return you get for bearing the nondiversifiable risk of the stock market 169。2020 Pearson Education, Inc. Chapter 15 54 Diversifiable vs. Nondiversifiable Risk ?Some risk cannot be eliminated or avoided ?Company profits depend on the economy – boom or recession ?Future economic growth is uncertain so cannot eliminate all risk ? Investors should be rewarded for bearing this risk ?Opportunity cost of investing is higher – must include risk premium 169。2020 Pearson Education, Inc. Chapter 15 52 Diversifiable vs. Nondiversifiable Risk ?Diversifiable risk can be eliminated by investing in many projects or by holding the stocks of many panies ?Nondiversifiable risk cannot be eliminated and should be entered into the risk premium 169。2020 Pearson Education, Inc. Chapter 15 50 The Net Present Value Criterion for Capital Investment Decisions 20205432)1(1)1(96. . . .)1(96.)1(96. )(1.5)(11)(15 5 N P VRRRRRRR???????????????169。2020 Pearson Education, Inc. Chapter 15 48 The Net Present Value Criterion for Capital Investment Decisions ?Negative Future Cash Flows ?Companies expect losses in certain situations ? Take time to build demand ? High up front costs that lower over time ?Investment should be adjusted for construction time and losses 169。2020 Pearson Education, Inc. Chapter 15 46 Real Versus Nominal Discount Rates ?If the cash flows are in real terms, then the discount rate must be in real terms as well ?Opportunity cost of the investment, so must include inflation here if doing it elsewhere ?Real R = nominal R inflation = 9% 5% = 4% 169。2020 Pearson Education, Inc. Chapter 15 44 The Net Present Value Criterion for Capital Investment Decisions ?When determining whether to invest or not, must distinguish between real and nominal rates ?Real versus Nominal Discount Rates ?Adjusting for the impact of inflation ?Assume price, cost, and profits are in real terms ? Inflation = 5% 169。2020 Pearson Education, Inc. Chapter 15 42 The Net Present Value Criterion for Capital Investment Decisions ?Assume all information is certain (no risk) ?R = government bond rate ?Discount rates below , NPV is positive ?Discount rates above , NPV is negative %*)1(1)1(96.. . . )(1. 9 6)(1. 9 6 10 N P V20202???????????RRRRR169。2020 Pearson Education, Inc. Chapter 15 40 The Net Present Value Criterion for Capital Investment Decisions ?Determining the Discount Rate ?The firm must determine the opportunity cost of its money ?The correct value of the discount rate should equal the rate that the firm could earn on a similar investment ? One with same risk ?We assume no risk for now, so opportunity cost is what the firm could earn on a government bond 169。2020 Pearson Education, Inc. Chapter 15 38 The Net Present Value Criterion for Capital Investment Decisions ?NPV Criterion ?Firms should invest if the present value of the expected future cash flows from an investment exceeds the cost of the investment 169。2020 Pearson Education, Inc. Chapter 15 36 The Yields on Corporate Bonds ?In 2020, Lucent had significant decline in revenue, laid off many workers and had an uncertain future ?The more risky financial situation required a higher yield on the bonds to entice investors to buy 169。2020 Pearson Education, Inc. Chapter 15 34 The Yields on Corporate Bonds ?The IBM bond yield: ?Assume annual payments and 10 years to maturity %*)1(1 00)1(...)(17 . 5)(17 . 5 251 20 10102??????????RRR. RR169。 13 10 Closing prices for Lucent on March 5, 2020 5 189。2020 Pearson Education, Inc. Chapter 15 32 The Yields on Corporate Bonds ?In order to calculate corporate bond yields, the face value of the bond and the amount of the coupon payment must be known ?Assume: ?IBM and Lucent both issue bonds with a face value of $100 and make coupon payments every six months 169。2020 Pearson Education, Inc. Chapter 15 30 Effective Yield on a Bond Interest Rate 0 PDV of Payments (Value of Bond) ($ thousands) The effective yield is the interest rate that equates the present value of a bond’s payment stream with the bond’s market price. Notice the Bond Price is inverse to the effective yield 169。2020 Pearson Education, Inc. Chapter 15 28 Effective Yield on a Bond ?From previous example R = $100/$1000 = = 10% ?The interest rate calculated here is the effective yield ?Rate of return one receives by investing in the bond 169。2020 Pearson Education, Inc. Chapter 15 26 The Effective Yield on a Bond ?Corporate and government bonds are often traded on the bond market ?The price of the bond can be determined by looking at the market price ?The value placed on it by buyers and sellers ?To pare t