1. Risk, Cost of Capital, Capital budget 2003,10,30

2. Present value Cash flow C_0,C_1, …, C_T NPV= 1/(1+r) is the discount factor What’s the real discount factor

3. Cost of capital NPV, cash flow, 1/(1+r) are related Given NPV and cash flow, we can find r=? This r is the require return Knowing r and cash flow, we can find NPV. Having r and NPV, we can verify cash flow.

4. Cost of capital The require return is the cost of capital to invest in the company (project) R=R_F + Beta*(R_M-R_F) R_F: risk-free rate R_M-R_F: market-risk premium Company beta: Beta

5. Beta Estimation of Beta Real-World Betas: stability of Beta, Using and industry Beta Equity beta, asset beta Beta_asset= Debt/asset *Beta_debt + equity/asset * Beta_equity

6. Beta of a company Cyclicality of revenues Operating leverage Financial leverage

7. The Firm versus The Project Corporate discount rate, Hurdle rate, cutoff rate, benchmark, and cost of capital are synonymous.

8. Weighted Average Cost of Capital (WACC) WACC=equity/asset * R_asset + debt/asset *R_debt *(1-Taxes) R_debt =interest

9. Liquidity Market-impact factor