公司金融课件 10.Return and Risk.docVIP

Exercise for PROJECT INVESTMENT EVALUATION: You have been asked to develop a bid price. The contract will be for 8 years and will result in a guaranteed sale of $9,000 per year. Fixed costs will be $550,000 per year. The equipment for the production line has an installed cost of $2,700,000 and it can be sold for $450,000 at the end of the project. The equipment will be depreciated straight-line over the 8-year life of the project. You will need $800,000 in working capital which will be recovered at the end of the project. The variable production costs are $790 per canoe. If your tax rate is 34% and the discount rate is 14%, what is the lowest bid price that should be submitted for the contract? ( PVIFA 8,14% = 4.6389) RETURN RISK NPV approach Discount rate The relationship between risk levels and required discount rates. CALCULATING RETURNS Dividend or Interest Payment: Dividend Yield = Dt+1 P1 Capital Gain or Loss: Capital Gain Yield = Pt+1 – Pt Pt Return = Dt+1 + (Pt+1 – Pt) Pt EXAMPLE: CALCULATING RETURNS You purchased a bond on January 1st, 2000 that had a face value of $1,000, an 8% annual coupon, and annual compounding. You paid $839.67 and you subsequently sold the bond at the end of December 2000 for $822.33. What was your percent rate of return for the year with this investment? HISTORICAL RECORD AVERAGE ANNUAL RETURNS 1949-97 TYPE OF INVESTMENT AVERAGE RETURN Canadian Common Stocks 13.13% U.S Common Stocks ( in Can $) 15.18 Long Bonds 7.81 Treasury Bills 6.09 Small Stocks 15.76 INFLATON 4.34 Over the period from 1948-97, risk free investments earned 6.09%. Using this risk free value, we can calculate the risk premium required for riskier investments over that same period. AVERAGE ANNUAL RETURNS RISK PREMIUMS 1949-97 TYPE OF AVERAGE RISK INVESTMENT RETURN PREMIUM Canadian Common Stocks