Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
Therefore the risk free rate is most likely slightly higher than would be if a ten-year treasury bond was used to determine the risk free rate.
Part 4:
You are having second thoughts about your choice of a proxy company and are concerned that a wrong choice may impact on the investment decision. To alleviate your fears (and those of the board) you run a sensitivity analysis to see how changes in the beta estimate affect your investment choice. You include this analysis in your report to the board and discuss the implications of you analysis.
Since the calculations used in the previous section were based off of a historical figure of beta that represents more of a conglomeration than just a grocer it is necessary to consider what would happen if the beta was incorrect. Since both organizations are at least remotely similar in their scope of operations a deviation of twenty percent error in should be sufficient to determine the sensitivity of the beta to such a miscalculation. Therefore an analysis can be conducted using betas of .74 (.93 * 80%) and also .84 (.93 * 90%). Since the beta is remarkably close to 1, it is unreasonable to suspect that the beta value was underestimated and hence the analysis should consider an overestimation by both ten and twenty percent.
Holding the variables used in the previous calculation constant (cet. par.) and changing the beta to .74 would result in a discount rate of roughly eleven and a half percent (11.52%). This would result in the discount rate being a full percentage point higher than previously estimated. If the beta value was only off by ten percent, then the discount rate would be roughly half a percentage point (10.82%). Since the Wesfarmers holdings are reasonably more diversified than the AusGrocer's holdings, it's reasonable...
Therefore it is recommended to the board that a beta of .81 be used (.93 * 85%) for future calculations.
However another interesting analysis would be to use a different risk free rate. The current coupon rate for a ten-year bond is 4.5% (Bloomberg, 2010). If this were substituted for the BAB risk free rate used in the prior analysis and the new beta was also substituted then the new discount rate would be 11.29%. This value is reasonably more accurate than using the BAB rate however the coupon rate was determined using the current rate as opposed to the historical rate and therefore subject to error.
To illustrate the effects that to the NPV values using a one percent change in the discount rate would have a stream of cash flows for ten years the following table was generated:
The table uses a discount rate of ten and eleven percent respectively and a million dollar per year stream of annual cash flows. It finds that a one percent change in the discount rate can equate to over a quarter of a million dollars in such a scenario.
Works Cited
Bloomberg. (2010, September 20). Government Bonds. Retrieved September 20, 2010, from Bloomberg: http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/
Reuters. (2010, September 20). Reuters Financial. Retrieved September 20, 2010, from Reuters: http://www.reuters.com/finance/stocks/overview?symbol=WES.AX
The Reserve Bank of Australia. (2010, September 20). Statistical Tables. Retrieved September 20, 2010, from The Reserve Bank of Australia: http://www.rba.gov.au/statistics/tables/index.html#interest_rates
Works Cited
Bloomberg. (2010, September 20). Government Bonds. Retrieved September 20, 2010, from Bloomberg: http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/
Reuters. (2010, September 20). Reuters Financial. Retrieved September 20, 2010, from Reuters: http://www.reuters.com/finance/stocks/overview?symbol=WES.AX
The Reserve Bank of Australia. (2010, September 20). Statistical Tables. Retrieved September 20, 2010, from The Reserve Bank of Australia: http://www.rba.gov.au/statistics/tables/index.html#interest_rates
Harley-Davidson Retail Sales and Deliveries Source: Seeking Alpha (2007) Over the past four years, account receivable growth has outpaced sales and the result is there is more inventory on dealer's lot than at any time in the history of HOG. The analysis states: "If the additional dealer inventory build was taken out of Harley's EPS from the previous two years and shipments evenly distributed throughout the quarters then Harley would have reported
By lowering interest rates, the government lowers the threshold of expected return for capital investments, thus making more investments economically viable. However, such supply side initiatives are weighed by firms against the potential income. If the economic outlook - that is to say the expected demand - is poor, such that the expected return will still not exceed the cost, then the investment will not be undertaken. In speaking with
Thus, the paper provides the following recommendations on the strategies that the company will use to prepare its 3-year financial plan to achieve its corporate objectives. First, Aztec needs to rely more on the share capital as source of fund than raising fund from the bank loan. Loan capital is the fund borrowed from the bank while the share capital represents the funds raised by selling shares to the public. Typically,
Apple Inc. Investment Analysis and Recommendations Apple Inc. is an American multinational company specializing in designing and producing mobile telecommunication devices that include iPhone, computer software and hardware, Apple TV, Apple Watch, iPod, and other electronic devices. Apple was incorporated and publicly registered in 1977. Headquartered in California, Apple is one of the most successful American companies in term of revenue with the annual revenue reaching $233.7 billion at the end
Global Business Cultural Analysis: Brazil Cultural backgrounds reflect the ways and standards of living, which is unique and different for each country. In fact, the business world is also profoundly influenced by the cultural differences of the counties. This focus of this research paper, in this regard, is to analyze the cultural perspectives of doing business in Brazil. Therefore, major elements and dimensions of Brazilian culture such as business structures, management
Financial Analysis of Lehman Brother Lehman Brothers The history has been full of financial collapses and financial scandals and one of the biggest financial collapses that a company has ever seen was that of Lehman brother. The collapse of a firm as huge as Lehman Brother and a firm which has such great experience of over a hundred years lead the world into a shock. It created doubts in the minds of