Introduction to Finance

Figure 18.3
shows an over 90-year history of investment-grade bond yields, and Figure 18.4 
presents a ten-year history of stock prices for one of the world’s largest fi rms, ExxonMobil. 
Although periods occur when corporate bond yields are stable, the eff ects of the business 
cycle, Fed policy, and fi nancial market risk premiums have resulted in more variability 
than stability with respect to interest rates in general and corporate bond yields in particular. 
Table 18.2
shows basic statistics about Aaa and Baa corporate bond yields over this time 
frame. Recalling our interpretation of the normal distribution from Chapter 12, we expect the 
yields on an Aaa corporate bond to fall within 3.17 and 8.66 percent (the average yield plus 
and minus one standard deviation) 65 percent of the time; for Baa bonds, the yields is expected 
to fall within 4.22 and 10.01 percent 65 percent of the time. That’s a wide range.
8
Association for Financial Professionals, 
2013 AFP Estimating and Applying Cost of Capital
, (October 2013), accessed 
September 1, 2016, at http://www.afponline.org/docs/default-source/default-document-library/pub/2013-cost-of-
capital-survey-highlights. John R. Graham and Campbell R. Harvey, “The Theory and Practice of Corporate Finance: 
Evidence from the Field,” 
Journal of Financial Economics
, Vol. 60, No. 1, 2001, pp. 187–243; Lawrence J. Gitman 
and Pieter A. Vandenberg, “Cost of Capital Techniques Used by Major US Firms: 1997 vs. 1980,” 
Financial Practice 
and Education
, Fall 2000, pp. 53–68; Lawrence J. Gitman and Vincent Mercurio, “Cost of Capital Techniques Used 
by Major U.S. Firms: Survey and Analysis of Fortune’s 1000,” 
Financial Management
, Vol. 14, 1982, pp. 21–29.

---

18.4 Weighted Average Cost of Capital
577
Similarly, stock prices and annual returns show little stability. This is expected, since we 
learned in Chapter 12 that risk levels determine expected returns; if stock prices were stable, 
that would not reward investors over time with higher expected returns. Table 12.4 shows 
historical variability in stocks and other fi nancial assets. In Chapter 12, we reviewed the his-
torical returns and risk of Walgreens and Microsoft stock. In