d to make an accept-or-reject decision by comparing the cost of capital with the internal rate of return on a given project. A project is accepted when the internal rate exceeds the cost of capital.
So the ABC company’s cost of capital is computed as follows:
Ordinary shares’ weight of total: 10,000,000/(10,000,000+5,000,000)=66.67%
Debentures’ weight of total: 5,000,000/(10,000,000+5,000,000)=33.33%
Dividend per share: 1,000,000/10,000,000=10%
Cost of capital=66.67%×10%+33.33%×8%=9.33%
Assumptions:
1． Constrained optimality:
A consumption allocation is a attainable through security markets if the net trade lies in the asset span for every agent. A feasible consumption assumption is constrained optimal if it is attainable through security market and if there doesn’t exist an alternative feasible allocation, also attainable through security markets, that Pareto dominates the allocation.
2． Effectively complete market:
If security markets are completed, then every allocation is attainable through security markets. Clearly then, constrained optimal allocations are Pareto optimal. In particular, security markets equilibrium allocations are Pareto optimal. A weaker sufficient condition for constrained optimal allocations to be Pareto optimal is that Pareto-optimal allocations be attainable throu security markets.
3． Effective Complete Markets with linear Risk Tolerance
When agent with linear tolerance with common slope and the 英语论文网 【http://www.51lunwen.org】risk-free payoff and agent’ endowments lies in the asset span. We assume that date-0 consumption doesn’t enter agents’ utility functions.
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