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Summary Results Of Financial Tasks Summary

Review the scenarios through 9. Assemble a report responding to the tasks you have been given by the Controller. Structure your report so it is clear which task you are addressing. Summarize the results of each task in the body of your report and refer to the detailed supporting calculations contained in your excel work sheet. This is a lessons learned report as well as your showcase for your individual thoughts and recommendations on all items completed during the semester.

Task 1 Assessment

As it relates to task 1, the task leverages the capital asset pricing model to determine an adequate rate of return for an investment. From the task, the betas obtained from Yahoo finance are often below meaning that the covariance between the stock and the overall market is not high. Within task 1, there was a beta of .59. This indicates for every 1 percentage point increase in the market, the stock only goes up roughly .59. This may indicate a very stable and mature company that doesnt have much price volatility as compared to the market. One area of concern related to task 1 is the equity risk premium. Here, the risk premium seems rather low considering the low interest rates prevailing in the market. I believe the expected return should be somewhat higher considering the robust GDP growth America has experienced recently, low interest rates, and accommodative monetary and fiscal policy. As a result, the expected market return should be somewhere near 9% and is calculated as 2-3% GDP growth, 2-3% inflation, and a 2-3% dividend yield. When combined, the expected market return should be somewhere between 6% and 9%. As the country is expected to experience rapid growth after COVID-19 due to pent up demand the return should probably be closer to 9%.

I disagree with the task statement noting that the industry is less risk because the industry beta is .88. Beta does not measure risk. It measures volatility which is not synonymous with risk. For most real-world investors, risk is defined as the propensity for permanent capital loss. Beta only shows how a particular stock price moves in relation to the market which again, does not measure riskiness. Likewise, during a market decline a stock with a beta of 2 will presumable decline twice as fast of the market. If the stock price is lower, then the stock is actually less risky for the investor as they are receiving more value when they purchase the stock. For example, if an investor believes the stock is worth $50 and the stock falls to $25 during a market decline, the security is much less risky as the investor has a much larger margin of safety when purchasing during a market decline. As a result, I disagree that with the task 1 statement that industry is less risky.

A lesson learned from Task 1 is...

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In addition, analyst should use other measurement techniques in conjunction with Beta to measure the overall riskiness of a particular stock.

Task Assessment

WACC is a very important concept as it relates to the ACME company and its ability to finance projects. In task two we learned that the WACC of the ACME company is relatively as compared to the required return base on CAPM in task 1. The WACC in task two was low due in part to the high leverage being employed in the business. In Task 2, ACME is using roughly 63% debt financing which significantly lowers its WACC due to how inexpensive debt financing is. This is also...

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…paying a dividend, this cash is reduced and if needed will not be available for the business during an extensive or protracted downturn.

Task 9 Assessment

Acquisitions are a very important element within the overall growth of a business. Acquisitions can help provide benefits such as better distributions networks, economies of scale, synergies relate to operations, and pricing power. Unfortunately, acquisitions have a very long and complex history of failing. In fact, most acquisitions fail to achieve the desired synergies promised by management. With task 9, ACME is considering an acquisition of a rival that operates in the industry, has no debt, strong sales figures, and potential synergies. When evaluating a potential acquisition, the Altman Z-Score is frequently used. Here a score of 23 or less indicates a potential distress zone. A score from 1.23 to 2.9 is characterized as the "Grey" Zone. A score of 9 or more is considered the "Safe" Zone. When evaluating the potential acquisition, the score falls into the grey zone which could indicate future financial distress. As a result, the company should not use all cash to acquire the business, but instead use a combination of debt and equity. It could also use its shares as currency as they appear to be overvalued and those can be leverage as means of purchasing the company. Likewise, due to the low cost of debt, the company can also use debt financings which is much cheaper than equity capital and is much easier to service on a go forward basis. A combination of the two forms of payment will not only lower the financial risk of the acquisitions, but it can preserve cash which can be used during periods of an economic downturn. Likewise, the cash can be used to help the combined franchise through synergies or product development.…

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