Over the next year, there is a 90% chance of the market being in state 1, otherwise it is in state 2. Shares in Cornelius.com will earn a return of 5.2% in state 1, and 7.5% in state 2. Shares in GiantBadger will earn a return of 6.5% in state 1, and 3.80% in state 2. You have invested 75% of your money in Cornelius.com, with the remainder in GiantBadger. What is your expected return over the next year
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Over the next year, there is a 90% chance of the market being in state 1, otherwise it is in state 2. Shares in Cornelius.com will earn a return of 5.2% in state 1, and 7.5% in state 2. Shares in GiantBadger will earn a return of 6.5% in state 1, and 3.80% in state 2. You have invested 75% of your money in Cornelius.com, with the remainder in GiantBadger. What is your expected return over the next year
In this question, we have to calculate the expected return from investment in Cornelius.com and GiantBadger share. Below is the expected return from both the shares in both the states.
| State | Probability | Cornelius.com Expected return | GiantBadger expected return |
| State 1 | 90% | 5.2% | 6.5% |
| State 2 | 10% | 7.5% | 3.80% |
Step by step
Solved in 2 steps
