Financial Management Question 1 Company

Financial Management

Question 1 company can do one of two things with its profits. The company can reinvest those profits in itself. The company can also give part of its profits to investors as a dividend. A company who gives out regular dividends is one that has very sound finances and is confident that it will stay that way.

Often rising stock prices result in lowering dividends. Rising dividends could also be due to a troubled company's stock dropping. To determine which situation is occurring, look into the payout ratio. The payout ratio compares the dividend payment with net profit. This ratio will reveal if a company is handling the dividend payments or of they are stretching hard to meet them.

The manager's advice can actually describe the reverse of what is happening in a particular company. Wise investors will not rest their decisions entirely on rising dividends.

Question

The beta is a measure of stock volatility. The stock market itself has a beta of 1. A stock with a beta of one will swing move with the market. A beta of zero indicates a stock that is independent of the market. This does not mean that the investment is risk free. A zero or near zero beta only indicates that the investment has created a condition that does not hold any correlation with the market.

Hedge funds by their very nature are never risk-free. These funds use very advanced investments strategies to maximize returns on investment. To get big returns the manager must take big risks. A near zero beta can mask risks taken in other places. If you were interested in investing in a hedge fund, you need to look beyond the beta coefficient to get a true idea of what that fund is doing.

Question

Diversification is a technique that reduces risks in an investment portfolio. By spreading out the types of investments in your portfolio, you protect yourself from the losses incurred by any one investment suddenly tanking. Diversification can be done in a several different ways. One common way is to vary investment vehicles; stocks, bonds, and cash. Another way is to take on stocks of different risk levels. You might hold a mix of large cap, small cap, and growth fund investments. Again, a crash in one area will be offset by stability or even gains in another. Another diversification strategy is holding companies of different industries or geographies. You might hold companies from steel, agribusiness or toys. You alternatively might hold companies from, China, India, and Canada. This is why diversification is called "a free lunch"; you are always protected from loss without automatically reducing returns on your investments.

Question

The Price-Earnings ratio compares the price of a company's stock to its earnings per share. In short, it uses a company's earnings to value its stock. It is based on the belief that the price of stock should be a reflection of a company's profit. Calculations for profit use net profits from some designated period of time.