Risk and return to investors

Compose a 500 words assignment on cost of capital, weighted average cost, cash flow, marginal cost. Cost of capital Cost of capital The relationship between risk and return to investors determines when and where to invest. To the risk averse investors, they prefer low returns with lower risks while the risk takers would invest in high-risk securities with high returns (Chandra, 2008). In most cases, probability of getting high returns is associated with high risks. This relationship also makes the investor be aware of their risk tolerance which improves on the investment approach. The relationship further explains that the risk takers will always ignore the risk involved and concentrate on returns on the investment.Annual Discount Rate13%Initial investment-20000-200001st year Return100000.88588502nd year Return80000.78362643rd year Return90000.69362374th year86000.6135271.8Net Present Value(NPV)6662.8Calculation of IRRCash inflows10000800090008600total=3560035600/4=890020000/8900=2.2472Yearcash flow22% PVIFPresent value1100001.2212200280001.48811904390001.81616344486002.21519049Present value of inflows59497PVIF 12%1100001.1211200280001.25410032390001.40512645486001.57413536.4Present value of inflows47413.45949722%5949722%47413.412%40000Cost12083.61949722%+19497/12083.6(10%)=22%+1.61351(10%)=22%+16.13%=38.13%3).Weighted average cost of capital refers to the average rate return a firm expects to reward its investors through bonds or equity. The weighted average cost of capital entails the entire rate of return that is utilized by the firm to determine viability of a company. The weights of both equity and debt financing are combined to determine weighted average cost of capital. Weighted average cost of capital= (weight of equity *cost of equity) + (weight of debt * cost of debt) Weighted average cost of equity= (0.45*0.6) + (0.2*1.06) = 0.482 =48.2% Weighted average cost of debt = (0.35*0.09) = 0.0315 =3.15% Weighted average cost of capital = 48.2 + 3.15 = 51.35 =51.35%4).5).Project XInitial investment -20000YearCash flowPVIF at discount rate 14%1 100000.87787702 80000.76961523 90000.67560754 8600 0.5925091.2 +NPV6088.2 Project YInitial investment-40000Year cash flowPVIF at discount rate of 14%1 200000.877175402130000.769 99973140000.675 94504160000.5929472 +NPV 6459Profitability index=PV of future cash flows Initial investmentProject X=26088.2Project Y=4645920000 40000 =1.30441 =1.16148Using the net present value, project y is more viable than x since it yields higher returns. This is contrary to profitability index approach which indicates that project x is more viable than y with a higher ratio of 1.3044.6).a). E(X) = x1p1 + x2p2 + x3p3 + . . . + xnpn. = (30*0.10) + (50*0.20) + (75*0.40) + (90*0.30) =70b). Standard deviation is a measure of the amount of variation of values from the average. Standard deviation =Square root of the expected value Therefore square root of 70 =8.3666This value is high which indicates that the data points are spread out over a large range.

References

Chandra, P. (2008). Financial management: Theory and practice. New Delhi: Tata McGraw-Hill Pub.

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