FINANCE: Chapter 5 - Capital Structure

1. Risk and Return (pg 129)
• The relationship between risk and return is one of the fundamental relationship in finance, because investors are risk averse, meaning they prefer less risk to greater risk.
• Investors who are risk averse will not invest in risky securities without greater expected returns.It means that to earn greater expected returns investors must be willing to accept greater risk.
2. Portfolio Risk (pg 134)
• Investors typically hold a collection or portfolio of assets, we need examine the risk of the portfolion context
• Risk and return in a portfolio is very different from stand-alone risk and return due to diversification effects.
• First examine the return of portfolio, then consider the risk of a portfolio
3. Capital Asset Pricing Model (pg 138)
• The measure of risk most commonly used in the single-factor CAPM is called beta (β).
4. Cost of Capital (pg 142)
• Capital includes funds supplied to the firm by long-term investors.
• These are usually stockholders and bondholders.
5. Cost of Debt and Equity Capital (pg 143)
• The cost of debt is the interest rate the firm would pay if it issued new debt today.
• Usually the firm will pay about the market interest rate (yield to maturity) on its bonds.