We calculate the exact amount of the contributions to the Social Security system and apply them to a market rate of return
to obtain the opportunity cost of Social Security.
These businesses also have the potential for a higher than market rate of return
on the money invested.
Ke = Krf + [beta] (Km - Krf) Ke = cost of equity Krf = risk free rate = 90-day Treasury Bill rate Km = expected market rate of return
[beta] = measure of risk compared to the overall market FIGURE 2 THE IMPACT OF BETA ON THE COST OF EQUITY Assume: Krf = 2%, Km = 12% If Beta = 0.5, Ke = 2% + 0.5 (12%-2%) = 7% If Beta = 1.0, Ke = 2% + 1.0 (12%-2%) = 12% If Beta = 1.5, Ke = 2% + 1.5 (12% - 2%) = 17% FIGURE 3 THE IMPACT OF THE WEIGHTED AVERAGE COST OF CAPITAL (WACC) ON NET PRESENT VALUE (NPV) OF CASH FLOWS If WACC = 10%, then NPV = $2.1 million If WACC = 15%, then NPV = $1.9 million If WACC = 20%, then NPV = $1.8 million
In that instance Alaska Permanent Capital Management strives to produce a market rate of return
based upon specific, predetermined risk characteristics.
Neal concludes that for those companies whose returns are strongly correlated with the market rate of return
, the evidence is consistent with the modem theory of the tradeoff between risk and rate of return.
Savers need to spend pounds 1.50 to get the market rate of return
on pounds 1.
That lets them take advantage of the market rate of return
, which is much higher than what the Social Security System offers (especially for younger workers, who will likely receive a negative return on their payroll contributions).
World Values invests a small percentage of its capital in microlending institutions like Grameen Bank and EEAF, and it offers a market rate of return
A cautionary note: It is easy to invest in financial assets and earn the market rate of return
, simply by purchasing a broad-based index fund.
The capital asset pricing model [cost of equity = risk-free rate + beta (risk premium, the historical difference between the market rate of return
and the risk-free return)] and the dividend discount model [price = earnings per share/(cost of equity - growth rate)] establish an inverse relationship between a company's price/earnings ratio and risk.
This table reports the market return tot he announcement of an open market share repurchase program (in percent) due only to the value of the exchange option, where "t" is the time to expiration of the option in years, [[Rho].sub.sv] measures the correlation between the "true" rate of return on the fundamental value of the firm and the market rate of return
, and [[Sigma].sub.s] is the annual standard deviation of the market rate of return
, which is assumed to equal [[Sigma].sub.v].
(7.) With respect to its largest single-family mortgage insurance program, the FHA's subsidy primarily takes the form of relief from the need to earn a private market rate of return
for shareholders rather than a direct government appropriation.