Trade off risk and return diagrams

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
Question 1........................................................................................................................................1
Trade off risk and return diagrams..............................................................................................1
Question 2........................................................................................................................................2
a. Net Present Value....................................................................................................................2
b. Payback Period........................................................................................................................2
c. & d. Advantage and Disadvantages.........................................................................................3
Question 3........................................................................................................................................3
a. Cost of Equity..........................................................................................................................3
b. Cost of Debt.............................................................................................................................4
c. Cost of Preferred stocks...........................................................................................................4
Question 4........................................................................................................................................5
a. Cost of issuing common stocks................................................................................................5
b. Cost of issuing preferred stocks...............................................................................................5
c. Financing proposal to be accepted...........................................................................................5
REFERENCES................................................................................................................................6

Question 1
Trade off risk and return diagrams
Risk return trade off states potential return rise with increase in the risk. Using principle
the individuals associates low level of the uncertainty with lower potential returns and higher
level of the uncertainty with lower potential return and high level of the uncertainty or the risk
with higher potential returns. As per risk return trade offs the invested money could render high
profits only investors accept the higher possibility of the losses.
The above chart shows trade off between risk and return of Marks and Spencer. There is
positive relationship between the risks and returns. When company invests in safer assets such as
Bank FDs, treasury bills or government bonds then the risk is lowest and also the returns. going
up risk ladder, return increases proportionately and similarly the risks. Risk here is defined as
volatility or standard deviation of returns (Risk – Return trade off, 2019). It means more
volatility of the returns that company is willing to put with greater risk appetite and higher is the
potential for returns. Risk return trade off is basic and important concept in the equity markets
(Shapiro and Hanouna, 2019). It is essential to understand to the equities in terms of different
assets classes and risk return trade offs. The concept is important as it forms the basis of portfolio
creation & long term return planning towards the financial goals.
1