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REVIEWER FINANCIAL MANAGEMENT

Checklist:

AMDG+ 2

flows is positive, the replacement should be made.

ACIAT : Annual cash inflow after tax Approach 1 Approach 2 Annual cash inflows before tax ZZZ Less depreciation (XXX) Annual net income before tax XXX Less tax (XXX) Annual net income after tax ANIAT XXX Add depreciation DDD Annual cash income after tax ACIAT YYY

Annual cash inflows before tax ZZZ (1-tax rate) plus Depreciation tax shield* Depreciation x tax rate DDD x tax rate ACIAT YYY

• Depreciation tax shield is always based on differential depreciation (new vs old); if there is no tax rate given, there is no DTS

Cash inflows → may be in the form of differential operating costs or savings or incremental contribution margin

SUMMARY OF INFLOWS, NET ACIAT X PVA factor = Salvage value (new) X (1-tax rate) X PV factor = Working capital released X PV factor = Less : Cash expense during the life of the asset (i.e. future overhaul/repair of new)

X (1-tax rate) X PV factor = ( ) NET INFLOWS

SUMMARY OF OUTFLOWS, NET Cost of investment x1. Less : Salvage value (old)* x1.0 ( ) Add : Working capital Required x1. Less : Overhaul of old Needed now x1.0 ( ) Net OUTFLOWS

*Salvage value (old)

Proceeds/ Market Value Proceeds/ Market Value -Book value of old -Book value of old Gain on sale (if P > BV) Loss on sale (if P < BV) X Tax rate X Tax rate Tax on gain Tax savings on loss

Salvage value Salvage value Less : tax on gain Add : tax savings on loss *Salvage value to be deducted from Investment outlay

*Salvage value to be deducted from Investment outlay

How to determine increase or decrease in units given an NPV* How to determine increase or decrease in savings ***** NPV (positive) Divide by PVA factor Divide by (1-tax rate) Divide by Contribution Margin per unit Decrease in units as to current sales in units, if NPV is negative → increase in units

NPV (positive) Divide by PVA factor Divide by (1-tax rate) Decrease in ACI before tax (or savings) if NPV is negative → increase in savings

***Another method is reconstruction of the formula to find the increase or decrease in units in NPV and in peso savings

Minimum required rate of return ➢ The company’s cost of capital is usually regarded as the minimum required rate of return ➢ Cost of capital is the average rate of return the company must pay to its long-term creditors and shareholders for the use of their funds. COST OF CAPITAL AS A SCREENING TOOL NPV method

• The cost of capital is used as the DISCOUNT RATE when computing the NPV of the project.
• Any project with NEGATIVE NPV is rejected IRR method
• The cost of capital is used as the HURDLE RATE that a project must clear for acceptance.
• It is compared to the IRR of a project.
• Any project whose IRR is less than the cost of capital is rejected.

METHODS NOT CONSIDERING TIME VALUE OF MONEY

Payback**** Accounting/ Simple/ Book Value Rate of Return

𝒑𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅 = (^) 𝑨𝒏𝒏𝒖𝒂𝒍 𝒄𝒂𝒔𝒉 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙 𝑨𝑪𝑰𝑨𝑻 →𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝒐𝒖𝒕𝒍𝒂𝒚 (𝒐𝒓𝒊𝒈𝒊𝒏𝒂𝒍) 𝐢𝐟𝐜𝐚𝐬𝐡 𝐢𝐧𝐟𝐥𝐨𝐰𝐬 𝐚𝐫𝐞 𝐮𝐧𝐢𝐟𝐨𝐫𝐦

Book Value Rate of Return = (^) 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑜𝑢𝑡𝑙𝑎𝑦𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 𝐴𝑁𝐼𝐴𝑇 𝑜𝑟𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 ∗

∗ 𝑎𝑣𝑒. 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 +^ 𝑠𝑎 2 𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒^ 𝑎𝑡𝑡ℎ𝑒 𝑒𝑛𝑑

• Indicates project liquidity and risk, with shorter projects providing better liquidity
• The length of time required for an investment’s net revenues to cover its cost; is a break-even calculation
• Flaws: (1) dollars received in different years are given the same weight**; (2) Cash flows beyond the payback year are given no consideration regardless of how large they might be; (3) there is no relationship between investor’s wealth and the payback period **addressed in the discounted payback period method
  • Initial investment in the formula should be reduced by any salve value realized from the sale of old equipment replaced
  • Focuses on accounting net operating income rather than cash flows
  • Compares project’s expected ARR with a hurdle rate or a desired rate of return
  • The only method that uses the annual net income after tax as a measurement of the returns

****If cash inflows are not uniform in Payback period method: Cash Outflow Cash flow in a year

Cumulative cash flows

Unrecovered Investments

Payback period ∗ 𝒇𝒓𝒂𝒄𝒕𝒊𝒐𝒏𝒂𝒍 𝒑𝒂𝒓𝒕

Fractional Part* *50,000/200,

NOTES

1. The rankings of mutually exclusive investments determined using the internal rate of return method (IRR) and the

net present value method (NPV) may be different when multiple projects have unequal lives and the size of the

investment for each project is different —see NPV profile lesson for clarification.

2. The disadvantage of NPV method is it does not provide the true rate of return on investment

3. The proper discount rate to use to calculating certainty equivalent net present value is the risk- free rate

4. The use of an accelerated method instead of the straight- line method of depreciation in computing the NPV of a

project will be increasing the present value of the depreciation tax shield in earlier periods

5. Increasing the discount rate would decrease the NPV

6. In an inflationary environment, adjustments should be made to increase the estimated cash inflows and increase

the discount rate

7. The future asset depreciation expense is not included in discounted flow analysis but the tax effects of future asset

depreciation is included.

8. When the problem does not state "IGNORE SALVAGE VALUE" or "WITHOUT ANY REDUCTION FOR

SALVAGE VALUE", include the salvage value in the computation

9. If the problem DOES NOT indicate AVERAGE investment, then use the original or initial investment in the

Accounting rate of return method

10. Note that the discounted payback period is LONGER THAN the traditional payback period.

11. Strategic Business Plan —a long run plan that outlines in broad terms the firm’s basic strategy for the next 5 to

10 years

C O S T O F C A P I T A L FM-

BASICS

• A firm’s primary objective is to maximize its shareholders’ value. The principal way value is increased in by investing in

projects that earn more than their cost of capital.

• The rates of return that investors require on bonds and stocks represent the costs of those securities to the firm.
• The cost of capital is a key element in capital budgeting decisions

CAPITAL COMPONENT

 One of the types of capital used by firms to raise funds

 The investor-supplied items (debt, preferred stock, and common equity) are called capital components

 Increases in assets must be financed by increases in these capital components

 The cost of each component is called its component cost.

Cost of debt rd

Cost of Preferred

Stock rp

Cost of Common Equity

 The cost of common equity is based on the returns that investors require on the company’s common stock.  Equity raised by issuing common stock has a HIGHER cost than equity from retained earnings due to flotation costs required to sell new common stock.  Raised in two ways: (1 ) by retaining some of the current year’s earnings and (2) issuing new common stock

Cost of Retained Earnings rs Cost of New Com Stock r. e

𝒓𝒅 = 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐫𝐚𝐭𝐞 𝐨𝐧 𝐧𝐞𝐰 𝐝𝐞𝐛𝐭 (𝟏 − 𝐓) (^) rp = Preferred Dividend Preferred Stock Price

∗ 𝑟𝑠 = 𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒+ (𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚)(𝑏𝑒𝑡𝑎)

∗∗ 𝑟𝑠 = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 + 𝑔 ∗∗∗ 𝑟𝑠 = Bond yield + 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚  𝐫𝐢𝐬𝐤 𝐩𝐫𝐞𝐦𝐢𝐮𝐦 = average return onstock − risk free rate  retention ratio or plowback = 1- Dividend payout ratio  growth rate (g) = return on equity x retention ratio  Return on equity = Net income/ equity

𝑟𝑒 = 𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 (1 − 𝑓𝑙𝑜𝑡𝑎𝑡𝑖𝑜𝑛 % 𝑡𝑜 𝑏𝑒𝑝𝑎𝑖𝑑) + 𝑔

 growth rate (g) = return on equity x retention ratio

• Before- tax cost of debt —the interest rate a firm must pay on its new debt
• After- tax cost of debt —is the interest rate on new debt less tax savings because interest in tax deductible
• After- tax cost of debt is used in calculating the WACC because stock price depends on after- tax cash flows
• Interest rate on new debt can be estimated by asking bankers or by finding the yield to maturity (or yield to call)
• Only debt has a tax adjustment factor
• Tax rate for firm with losses is 0
• We can adjust for flotation costs by deducting the dollar flotation costs from the issue price (par value of the bond and calculating an adjusted YTM - Rate of return investors require on the firm’s preferred stock

 No direct costs are associated with retained earnings, but this capital has an OPPORTUNITY COST  The firm needs to earn at least as much on any earnings retained as the stockholders could earn an alternative investment of comparable risk.  Cost of Retrained Earnings are hard to estimate, so reasonably good techniques are employed to estimate this: the required rate of return for the CAPM approach, and expected rate of return for DCF approach  When stock is in equilibrium, required rate of return equals the expected rate of return

 Cost of capital raised is the investors’ required rate of return plus the flotation cost  Flotation cost —bankers’ fees ( investment bankers help the company structure the terms, set the price for the issue, and sell the issue to investors ); the percentage cost of issuing a new common stock

If Company M can borrow at an interest rate of 10% and the income tax rate is 30%. The after-tax cost of debt is 7%

After-tax cost of debt = 10 % x (1-0.30) = 7%

Company M does not have any preferred stock outstanding, but the company plans to issue some in the future and has included it in its target capital structure. The stock would have a P10.00 dividend per share and it would be priced at P97.50 per share.

Cost of PS = Dividend per share / current price = P10.00 / P97. = 10.3 %

Suppose investors require a 13.7% return on their investment, but flotation costs represent 10% of the funds raised. The firm actually keeps and invests only 90% of the amount that investors supplied = 1.25 / 23.06 (1-0.10) + 8.3 % =1.25 / 20.75 + 8.3 % = 14.3 %  The firm must earn about 14.3% on the available funds in order to provide investors with a 13.7% return on their investment.  This higher rate of return is the flotation-adjusted cost of equity

Cost of Common Equity Required Rate of Return = Expected Rate of Return Risk-free rate + Risk premium = Dividend yield + Growth rate ***CAPITAL ASSET PRICING MODEL (CAPM) DIVIDEND YIELD PLUS GROWTH RATE OR DISCOUNTED CASH FLOW (DCF) MODEL Step 1 : Estimate the risk-free rate. (Use either 10-yr Treasury bond rate or the short-term Treasury bill rate)

Step 2 : Estimate the stocks beta coefficient, b, and use it as an index of the stock’s risk.

Step 3 : Estimate the market risk premium. This is the difference between the return that investors require on an average stock and the risk-free rate.

Step 4 : Substitute the preceding values in the CAPM equation to estimate the required rate of return on the stock in question

Assume that in today’s market, risk-free rate is 5.6%, the market risk premium is 5% and M Company’s beta is 1.48. Using the CAPM approach,

Cost of equity = risk-free rate + (risk premium)(beta) = 5.6 % + (5%)(1.48) = 13 %

Beta coefficient —a measure of an asset’s systematic risk; a measure of a stock volatility relative to the overall stock market; the sensitivity of stock’s returns to the returns on some market index; A beta greater than 1 indicates greater volatility (price movements) than the market while less than 1 would mean lesser volatility.

M Company’s stock sells for P23.06, its next expected dividend is P1.25 and security analysts expect its growth rate to be 8.3 %. The company’s expected and required rates of return or the

Cost of RE = Dividend per share + Growth

Current price rate

= 1.25 / 23.06 + 8.3%

= 13.7 %

 13.7 % is the minimum rate of return that should be earned on retained earnings to justify plowing earnings back into the business rather than paying them out as dividends.  Since investors are thought to have an opportunity to earn 13.7 % if earnings are paid out as dividends, the opportunity cost of equity from retained earnings is 13.7 %.  Expected growth rate = Return on equity X retention ratio  Retention ratio or plowback ratio = 1 – Dividend payout ratio

• Use the next or expected dividend per share, not the current dividend per share

*** Other methods are: (1) Bond yield plus risk premium approach BY+ RP (2) averaging the alternatives (weight results of CAPM,

DCF, BY+RP methods)

WHEN MUST NEW COMMON STOCK BE ISSUED?

• Firms should utilize retained earnings first before issuing new common stock
• Retained earnings breakpoint —total amount of capital that can be raised before new stock must be issued

Example: Addition to retained earnings in 2020 is expected to be P66 million; and its target capital structure consists of

45% debt, 2% preferred, and 53% equity

Retained earnings breakpoint= 66/ 0.53= 124.5 million

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

• A weighted average of the component costs of debt, preferred stock, and common equity

% of debt x After- tax cost of debt = DDD

% of preferred stock x Cost of preferred stock = + PPP

% of Common stock x Cost of common equity = + CCC

WACC

NOTES

1. A substantial increase in nominal rate with no effect on the future dividends for a company over the long run would result in a decrease of the company’s stock price.
2. A higher degree of operating leverage compared with the industry average implies that the firm has profit that is more sensitive to changes in sales volume
3. Maximizing the net worth of the firm is consistent with the plans to finance future investment so that firm will achieve an optimum capital structure.
4. In problems asking for marginal WACC , assume that all retained earnings have been used, meaning that the weight percentage of the cost of common equity are ALL weight percentage of Cost of New Common Equity

FACTORS THAT AFFECT WACC

FACTORS THE FIRM CANNOT CONTROL FACTORS THE FIRM CAN CONTROL

 INTEREST RATES IN THE ECONOMY

 THE GENERAL LEVEL OF STOCK PRICES

 TAX RATES

 BY CHANGING ITS CAPITAL STRUCTURE

 BY CHANGING ITS DIVIDEND PAYOUT RATIO

 BY ALTERING ITS CAPITAL BUDGETING DECISION RULES

TO ACCEPT PROJECTS WITH MORE OR LESS RISK THAN

PROJECTS PREVIOUSLY UNDERTAKEN

AMDG+ 7

5. Price Per Earnings Ratio = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

6.7. Dividend Payout Ratio =An increase in marginal tax rate, ceteris paribus, would DECREASE the cost of debt 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

CALCULATING THE STATISTICAL MEASURES

Economy Which Affects Demand

Probability of Demand Occuring

Rate of Returns If Demand Occurs Product (2)x(3)

Deviation: Actual - 12% Expected Return

Deviation Squared (2) x (6) (1) (2) (3) (4) (5) (6) (7) Strong 0.26 96% 24.96% 12.96% 1.68% 0. Normal 0.51 12% 6.12% -5.88% 0.35% 0. Weak 0.23 -83% -19.09% -31.09% 9.67% 0. 1.00 Expected return= 12% Variance= 0. Standard deviation 16.84% Note: Probability of demand occurring must equal to 100%

RISK AVERSION AND REQUIRED RETURNS

• Risk-averse investors dislike risk and require higher rates of return as an inducement to buy riskier securities

Implications of risk aversion for security prices and rates of return: Other things held constant, the higher a

security’s risk, the higher its required return; and if this situation does not hold, prices will change to bring about

the required condition.

• Risk Premium —the difference between the expected rate of return on a given risky asset and that on a less risky

asset.

In a market dominated by risk-averse investors, riskier securities compared to less risky securities must have

higher expected returns as estimated by the marginal investor. If this situation does not exist, buying and selling

will occur until it does exist.

RISK AND RETURNS IN A PORTFOLIO CONTEXT

The risk and return of an individual stock should be analyzed in terms of how the security affects the risk and return of the

portfolio in which it is held.

Capital Asset Pricing Model (CAPM) —model based on the proposition that any stocks required rate of return is equal

to the risk free rate of return plus a risk premium that reflects only the risk remaining after diversification.

A. Expected Portfolio Returns

• Expected return on a portfolio 𝑟𝑝 —weighted average of the expected returns on the assets held in the portfolio
• Realized rate of return —the return that was actually earned during some past period. The actual return usually

turns out to be different from the expected return except for riskless assets

𝑟𝑝 = ∑(fraction of the asset in the portfolio)𝑖 (𝑟)𝑖

𝑛

𝑖= Stock Expected Return Dollars Invested Percent of Total (2) x (4) (1) (2) (3) (4) (5) A 18.00% ₱25,000.00 25.00% 4.50% B 16.85% ₱25,000.00 25.00% 4.21% C 13.45% ₱25,000.00 25.00% 3.36% D 9.20% ₱25,000.00 25.00% 2.30% Average 14.38% ₱100,000.00 100.00% 14.38%

B. Portfolio Risk

• Portfolio Risk 𝛔𝒑—generally smaller than the average of the stocks’ standard deviations because diversification

lowers the portfolio’s risk. It is not an appropriate measure of the risk held in a portfolio. Beta Coefficient is used

instead.

Expected return is the weighted average of the expected returns on its individual stocks; not the weighted average

of the individual stock’s standard deviation

• Correlation —tendency of two variables to move together
• Correlation coefficient ( 𝜌 "𝑟ℎ𝑜")—measures the degree of relationship between two variables

i. 𝜌 = −1.0 perfectly negative correlation, variables move in opposite direction

ii. ∗∗ 𝜌 = +1.0 perfectly positive correlation, variables move in the same direction

iii. 𝜌 = 0 indicates that two variables are not related and are independent from each other

**Note: diversification is completely useless for reducing risk if the stocks in the portfolio are perfectly positively correlated

• As a rule, on average, portfolio risk declines as the number of stocks in a portfolio increases
• Diversifiable risk (company-specific/ unsystematic risk) —part of a security’s risk associated with random

events; can be eliminated by proper diversification

• Market risk (non-diversifiable/ systematic/ beta risk) —risk that remains in a portfolio after diversification has

eliminated all company- specific risk; stems from systematic macro factors. Measured by Beta coefficient.

C. Beta Coefficient

• Relevant Risk in a portfolio context —risk that remains once a stock is in a diversified portfolio is its contribution

to the portfolio’s market risk. It is measured by the extent to which the stock moves up or down with the market.

• Beta coefficient —metric that shows the extent to which a given stock’s returns move up and down with the stock

market. Beta thus measures market risk not diversifiable risk (important: always asked in theories)

i. 𝑏 = 1.0 is an average stock’s beta, moving up and down in step with the general market

ii. 𝑏 = 2.0 is twice as volatile, or risky, as an average stock

iii. 𝑏 = 0.5 is only half as volatile, or risky, as the average stock

iv. Negative beta is uncommon, stock’s returns would tend to rise whenever other stock’s returns fell

• Beta of a portfolio b (^) 𝑝 = ∑ (fraction of the stock in the portfolio)𝑖 (b)𝑖

𝑛 𝑖=

RELATIONSHIP BETWEEN RISK AND RATES OF RETURN

• Market risk premium — additional return over the risk- free rate needed to compensate investors for assuming

an average amount of risk. 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 = 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 − 𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒

• Security Market Line (SML) equation —equation showing the relationship between risk as measured by beta

and the required rates of return on individual securities

THE IMPACT OF EXPECTED INFLATION

• Note that an increase in the risk-free rate leads to equal increase in the rates of return on all risky assets because

the same inflation premium is built into required rates of return on both riskless and risky assets.

NOTES

2. In reality, most stocks are positively correlated but not perfectly so. Study suggests that average correlation lies at

3. CAPM method gauges risk only relative to returns on the market portfolio, meaning the market risk (important:

asked in theories)

4. When assessing performance, the real returns (what you have left after inflation) is what matters. It follows that

as expected inflation increases, investors need to receive higher nominal returns

5. The risk of an investment often depends on how long you plan to hold the investment. Stocks are less risky when

held as part of a long- term portfolio.

6. If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the

portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the

portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.

7. It could never be true that the beta of the portfolio is lower than the lowers of the three betas of three randomly

selected stocks

8. Rank of investment from highest to lowest risk (and return): small- company stocks, large- company stocks,

long- term corporate bonds, long- term government bonds, U.S Treasure bills

9. Note that risk free rate is based on T- bonds, not short- term T- bills.

10. Assume that the required rate of return on the marketed at 10%. If the yield curve were upward sloping, then the

SML would have a steeper slope if 1- year Treasure securities were used as the risk- free rate than if 30- year

Treasury bonds were used.

Stock Dollars Invested

Percent of Total

Beta

X ₱25,000 33.33% 0.80 = 0.

Y ₱25,000 33.33% 1.20 = 0.

Z ₱25,000 33.33% 1.60 = 0.

Portfolio Beta1.

Stock (^) InvestedDollars^ Percent ofTotal^ Risk FreeRate Premium^ Risk Beta (1) (2) (3) (4) (5) (6) A ₱400,000 10.00% 6% 8% (^) 1.5 = (^) 1.8% B ₱600,000 15.00% 6% 8% -0.5 = 0.3% C ₱1,000,000 25.00% 6% 8% 1.25 = 4.0% D ₱2,000,000 50.00% 6% 8% (^) 0.75 = (^) 6.0% ₱4,000,000 Fund Required Rate of Return = 12.1%

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