Your firm has 100 shares of stock outstanding, which have a current market price of $1,000 per share. Your debt has a face value of $124,000 and a market value of $150,000. Your debt beta is 0.5 and the equity returns have a standard deviation of 50% and a correlation with market returns of 0.4. Under the MM theorem, what is the WACC if the risk free rate is 7% and the expected market returns is 10% with a standard deviation of 10%?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Your firm has 100 shares of stock outstanding, which have a current market price of $1,000 per share. Your debt has a face value of $124,000 and a market value of $150,000. Your debt beta is 0.5 and the equity returns have a standard deviation of 50% and a correlation with market returns of 0.4. Under the MM theorem, what is the WACC if the risk free rate is 7% and the expected market returns is 10% with a standard deviation of 10%?
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