Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/7

Click to flip

7 Cards in this Set

  • Front
  • Back

Note:




Marginal Cost of Capital Assumption:

-The balance sheet capital breakdown is the firm optimal capital structure.


-Fix long run condition to short run

Assumptions of the MCC:

1.We will take the projects in order based on the IRR.


2.If the project has IRR>WACC, managers will invest in the project.


3.HH will know about it and invest


4.We made the assumption that risks of projects are the same.


4.The projects have the same risk= average risk of the firm


*MCC=WACC (rd, rpfd, rs)

Note:




Example of 2 projects:

-Reparing piece of machinery that warned out


-Opening a steel plant in Venezuela


-These project's risk is not the same

We need some way to risk adjust projects:




2 methods:

1.Project Market Line


2.Risk buckets

Project Market Line:

Takes risk adjustment of projects into consideration


-->We will accept projects when IRR>WACC

Hurdle Rate Method:

The Method compares the MCC to the Investment Opportunity Schedule to determine which projects to accept or reject.


-You accept any project where the IRR>WACC

Second method:




Risk buckets:

-We put individual projects into risk buckets


-The team will then assign the required return for each risk bucket.