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that you need to, that you need to do.
It's important that you actually do that lecture before you test yourself in
the assignments that we're going to have.
I thought of each of these lectures as a compliment of the lectures.
So, these two things actually compliment each other, and
the ideal sequence is first you hear the session, then you actually read
the complimentary reading, and then you get to work on, on the assignment.
So, we worked a little bit on investors, and
we looked at the different ways of assessing return, and different ways of
assessing risk, and, one way, at least, of putting together risk and return.
By highlighting that, at the end of the day, that is what investors really want,
to maximize the combination between risk and return.
What we call risk adjusted return.
And, we emphasized that one of the key ways of
doing that is proper diversification.
So, diversification is both the goal and
the end result of trying to maximize those risk adjusted returns.
Remember, also, why we discussed investors.
Because, investors are the one that are going to provide capital for
corporations to operate.
And, those investors are going to be requiring a return, and corporations and
investors are going to be interacting in the market.
So, then we move to talk a little bit about corporations, and
we started with either the, or one of the most principal, and elementary,
and basic, and essential variables in any company, which is the cost of capital.
We looked at, at the, the cost of capital from an intuitive point of view.
We broke it down into the cost of debt, into the cost of equity.
How we observe the cost of debt.
How we need to estimate the cost of equity.
We brought everything together into that expression for the cost of capital.
And, then we spend one session calculating the cost of capital for
Starbucks sometime in 2013.
And, finally, having understood, and
having estimated that cost of capital, we apply that central idea to two things.
One is to project evaluation.
This is something that companies need to do routinely.
They do it on an ongoing basis, because that's what corporations do.
They think of things that they can sell, products or services that they can sell.
But, before they actually get them to the market,
they need to think whether it pays to take them to the market, or not.
And, that is what we call project evaluation,
in which the cost of capital plays a very critical role.
And, we left for
the very end a very, very broad look at the corporation, from way up above.
Corporations do a lot of little things, but
at the end of the day, what we want them to do is not to misuse capital.
We want them to use capital wisely.
And, that basically means,
that we need to take into account the cost of that capital, the return on that
capital, and therefore calculate the EVA, economic profit, or residual income.
And, that basically tells you that you're going to be creating value,
as long as you deliver a return that is higher than the cost of the capital
that you need to raise in order to invest in whatever that corporation does.
So, I hope that you actually enjoyed this course.
I hope that you have learned a little bit.
I hope you do the lectures, and you actually pass some of the exams.
That you get a nice certificate that actually certifies that you
have taken this course, and I hope to see you some other time.
Goodbye.
[MUSIC]
Javier EstradaProfessor of Financial Management
