MGT339H5 Study Guide - Final Guide: Weighted Arithmetic Mean, Public Company, Risk-Free Interest Rate
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Class 1: calculating beta in practice (to be done in class) note that this method only works for publicly traded firms, determinants of beta, cyclicality of revenues. We can find the expected return on the financial asset (a stock) using the capm. We need to know the risk free rate, the market risk premium and the beta of the stock. Suppose the firm is considering undertaking a project whose risk level is different from the firm overall, and we wish to estimate the project beta, so that we can calculate the project cost of equity capital. The same approach would work to determine the cost of capital of an all- equity financed private firm. The presence of debt will make the story more complicated, as we shall see later. Find the profit for a and b if revenue is i) ,000, ii) ,000, iii) Conclusion: clearly a is more risky than b gives more uncertain profits.
