Asset Pricing Model Essays (Examples)

Capital Asset Pricing Model and Arbitrage Pricing Theory:
Capital Asset Pricing Model (CAPM) is an arithmetical theory that describes the relationship between risk and return in a balanced market. The Capital Assets Pricing Model was autonomously and simultaneously developed by William Sharpe, Jan Mossin, and John Litner. The researches of these founders were published in three different and highly respected journal articles between 1964 and 1966. Since its inception, the model has been used in various applications that range from public utility rates to corporate capital budgeting. However, the initial introduction of the model was characterized by suspicious view from the investment community. This was largely because CAPM apparently indicated that professional investment management was hugely a waste of time. Due to its implementation problems and shortcomings associated with its relation to Arbitrage Pricing Theory, Capital Asset Pricing Model has continued to face constant academic attacks.

Overview of Capital Asset…

Finance
There are three different models that can be used to estimate a company's cost of capital. Basically, each of these three is used to estimate the cost of equity. The cost of debt is usually calculated on the basis of the current weighted average of the yield to maturity on the company's debt. Thus, it is the cost of equity that must be calculated. The cost of equity reflects the return that the shareholders need to be paid in order for them to own the stock. This have given us three major approaches to calculating the cost of equity.

The first of these is the capital asset pricing model. The formula for this is:

Investopedia (2013)

The cost of equity therefore reflects three major components. The first is the risk free rate, which is inherent in all securities. The second is the market risk premium, which is added to…

The CAPM is useful to investors from two standpoints -- time value of money and the risk associated with the money invested. The time value of money is revealed by the free rate risk and represents the compensation investors will receive for having invested their money in the respective share, for a specific period of time. The risk of the investment is revealed by the second part of the formula -- beta x (expected market return -- risk free rate) -- and it unveils the compensation the investor should receive for making an investment with the given levels of risk involved. In achieving this desiderate, the Capital Asset Pricing Model assigns a beta, which helps compare the returns of the asset to the market, over the given time period, and to the market premium. Basically, "the CAPM says that the expected return of a security or a portfolio equals the…

Capital Asset Pricing Model (CAPM)
Basically, a diversifiable risk can be taken to be that risk which is largely limited to a given sector or security. On the other hand, a risk which affects the entire assets or liabilities class is referred to as an un-diversifiable risk. While it is possible to eliminate or reduce a diversifiable risk through diversification, the same cannot be utilized when it comes to the elimination or reduction of an un-diversifiable risk.

A Substantial Unexpected Increase in Inflation

This can be classified under un-diversifiable risks. According to Huwawini & Viallet (2010), events that seem to impact on the entire economy are in most cases the sources of un-diversifiable risks. Inflation impacts on an entire economy and is hence an un-diversifiable risk. This risk cannot be minimized through diversifying a portfolio

A Major ecession in the U.S.

A downturn in economic activity is referred to as…

Finance
Assessing WalMart Cost of Equity

Cost of Equity Using CAPM

To calculate the cost of equity using the capital asset pricing model (CAPM), the equation requires collection of some data regarding the firm and the market. The equation tells us what data is needed, the equation is cost of equity = F + ?(M - F). F is the risk free rate, M is the return on a market portfolio, and ? is the beta.

The equation starts with the requirement to determine the risk free rate (F). The risk free rate is usually the current rate for government bonds. There is some flexibility here, as government bonds are issued over different periods, a common term used is the one year bond rates. The current rate given for 20th December 2013 is 0.13% (U.S. Department of Treasury, 2013).

The next input is the return on the market portfolio. This…

CAPM
The capital asset pricing model (CAPM)

The basic concept behind the capital asset pricing model (CAPM) is that when investors accept additional risk, they should be rewarded with greater compensation. The formula for the model is as follows:

(Image source: CAPM, 2013, Investopedia)

It should be noted that the CAPM is just that -- a model -- and certain artificial conditions are assumed to make the formula work, namely an absence of taxes and transaction costs like broker's fees; symmetrical knowledge of information and "identical investment horizons" for all investors; and finally that "all investors have identical opinions about expected returns, volatilities and correlations of available investments" (Capital asset pricing model, 2013, isk Encyclopedia). In the model, "the time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other…

Investopedia, a noteworthy financial website designed by Forbes Media and aiming to sustain investing decisions, defines the cost of equity as "the return that stockholders require for a company […]. A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership."
The CAPM equitation:

ra = rf + ?a x (rm - rf) (Investopedia)

In our scenario, the risk free rate is of 4.5, the risk of the security is of 0.5542 and the expected market return on the Coca Cola share is of 11. Given this situation, the cost of equity (ra) can be computed as follows: 4.5 + 0.5442 x 6.5 = 8.0373

3. Portfolio Beta

Knowing the risks associated with each investment in the portfolio, the beta of the portfolio can be computed by summing up the multiplications of each individual beta times the…

CAPM
For each of the scenarios below, explain whether or not it represents a diversifiable or undiversifiable risk. Explain your reasoning a. It is announced that a company is under investigation from the federal government for fraudulent accounting practices.

This represents a diversifiable risk. This risk is unsystematic and is unique to the company that is under investigation. Hopefully, if this stock was part of a portfolio, the effect of this risk will be relatively small on the overall value of the portfolio.

A major terrorist attack occurs in the U.S. again.

A terrorist attack would be an undiversifiable risk. The consequences of the attack would ripple through the entire economy and would influence a large number of assets. This market risk is systematic and can't be eliminated by diversification.

c. A large increase in the price of oil.

Although this development might affect a range of stocks the risk…

Finance
Any Asset Pricing Theory forms the basic foundation of finance theory, in that it deals with the value of any asset under unknown or uncertain circumstances. The relationship between an asset and its price is the mainstay of the asset pricing theory: the lower the price, the poorer the expected performance. The Arbitrage Pricing Theory derives from this theory. The basic idea in the APT theory is that any sort of risk in asset returns must not affect the pricing of the asset in any way; it must depend on the covariance of assets with the risk factors. (Bayesian Approach of the Arbitrage Pricing Theory) The APT originated from Stephen oss, 1976-1978. oss had used a statistical procedure for assets returns, with the belief that there are in existence no arbitrage probabilities. The APT must of necessity involve a lot of risk taking processes, (Definition of Arbitrage Pricing Theory.)…

Investor Diversification
Some investment assets have a diversifiable risk and some have an undiversifiable risk involved. Diversifiable risk is specific to a particular security or sector, so its impact on a diversified portfolio is limited to that particular security (moneyterms.co.uk). For example, a financial crisis in a country can cause diversifiable risk on the investments pertaining to the financial institutions. Undiversifiable risk is the tendency of stock prices to decrease, which is caused by something that affects returns on all stock in the same manner, such as war or an interest rate change (Legal).

A substantial unexpected increase in inflation would be an undiversifiable risk because it is common to an entire class of assets or liabilities, or all the stock on the market. It is also considered a market risk or a systematic risk. The economy expects prices to rise slowly over a period of time. That goes along…

Return on Financial Assets
There are a number of factors that affect bond pricing. The basic bond pricing formula is as follows:

Investopedia

In this formula, the coupon payments, number of payments, interest rate and value at maturity are taken into consideration. The question at hand pertains to bonds that are the same in all characteristics except time to maturity and risk level. The risk of the bond will be reflected in the interest rate and the time to maturity will be reflected in the number of payments remaining on the bond. Initially, it is easy to make a couple of basic assessments. The corporate bond with AAA will be rated more highly than one with BBB. This places BBB (X bond) last. ith a lower time to maturity than bond , the third bond (Y) will have a lower yield to maturity, because the shorter time to maturity will…

CAPM
There are several different models that can be used to help determine the cost of capital for a company. Each is based on a model, and can be understood not only in terms of its formula but also in terms of its underlying assumptions. These assumptions will provide the foundation for the model, and will inform the financial manager about the strengths and weaknesses of each model. This report will outline in detail three such major models for determining the cost of capital. The first is the capital asset pricing model, known as CAPM. The second is the dividend discount model, and the third is arbitrage pricing theory.

The capital asset pricing model is the first of the three major models for determining the cost of capital. CAPM is widely used to determine the cost of equity in particular. The underlying theory of CAPM is that stock returns relative…

Popular Cost of Equity Models: Problems and Potentials in Current Theory and Practice
It is important for any publicly traded business organization to understand and accurately estimate its cost of equity capital, in order to make effective capital-raising resource allocation decisions. There are several models for determining a supposedly accurate valuation for the current cost of equity capital for a given firm, however each of these models is imperfect in its approach and its ultimate assessment. The following pages provide an overview of three popular models for providing this valuation, assessing the models base don ease of use, accuracy of the prediction, and the degree to which the assumptions made or implied by the model are reflective of reality and actual operational capabilities. A final recommendation for a particular model is made following this assessment.

Ease of Use

One of the most straightforward methods for estimating the cost of equity…

CAPM
There are three models that can be used calculate the cost of capital for the firm. The first such model is the capital asset pricing model (CAPM). The CAPM formula is: E (rj )= RRF + b (RM - RRF). This means that the company's cost of capital is a function of the risk free rate, the market premium and the firm-specific risk. In CAPM, the firm-specific risk is based on the correlation of the company's stock price to the broader market, a statistic known as the beta.

Another method is the dividend growth model. In this model, the assumption is that a stock's value derives solely from the dividends that it is paying, or that investors assume it will pay in the future. It is assumed that investors will not pay for capital gains, because those are uncertain. The formula for the dividend growth model is:

source: Investopedia.…

CAPM
There are three different models for estimating the cost of capital -- the capital asset pricing model (CAPM), dividend discount model and arbitrage pricing theory (APT). Of these, CAPM is the best model. CAPM utilizes the returns on the company's stock to calculate the firm's cost of equity. The underlying theory is that the firm's cost of capital should "equal the rate on a risk-free security plus a risk premium" (Investopedia, 2012). The risk premium is related to the return on the company's stock. Arbitrage pricing theory is similar, using the same formula but instead of equating risk with the market return on the company's stock vs. The broad market index, the return on the company's stock is compared to a basket of macroeconomic indicators (Pietersz, 2011). These are chosen by the user, and the correlations must be calculated by the user and the weightings of the different indicators…

While the first chapter was brief, it is important to explain what will be studied and then move forward into the literature review.
In Chapter 2, the literature review provides a review of academic literature by way of journals and textbooks. This information is placed into separate sections which allow for ease of understanding. An introduction is made to capital structure, and information is given on the Indian capital structure specifically.

Chapter 3, the data methodology, provides the methodology that was used for the data. The reasons behind the methodology and what was studied are both discussed.

Chapter 4, data analysis and findings, is the chapter in which the results of the data analysis are presented.

Chapter 5, the conclusion, provides not only a conclusion to the research that was conducted in this paper but questions that are left and areas for further research in the future.

Literature Review

The…

For example, if the Fed sees inflation as a risk going forward, the market will place a weighting on that statement, allocating some form of increased interest rate to the future cash flows.
At the time of course, the exact implications of the Fed's comments are unknown. They imply that rates may move in one direction or another, but they are not an actual movement and the Fed reserves the right to change its mind before it meets again. The bond market is thus working with imperfect information. This can lead to general price movements but of unknown quantity. Over time, a reasonable correlation can be established, such as the elasticity of bond prices in relation to, for example, strong warnings from the Fed about inflation. Such a correlation can be drawn with a large enough sample size that it can be used in bond prices.

Overall, though, the exercise…

Pricing Water From a Utility Perspective
Water is usually a scarce commodity but not in all situations, such as in Virginia, which is characterized by plentiful ground water supply. However, the relevant agencies in this state incur costs relating to drilling and pumping water from the ground, procurement and infrastructure costs. Because of this, pricing of water has become an important factor in water management. For utility companies in Virginia and other states, selling the water at the appropriate price is increasingly important since low costs do not cover operational costs, whereas high costs contribute to inadequate sales. The determination of the most suitable pricing model or scheme requires critical evaluation from a utility perspective and whether this commodity is affected by the same principles of economics as other goods and services or utilities.

Price Sensitivity of Water

From a utility perspective, water has seemingly weak price sensitivity as compared…

Asset- Liability Management (banking)
The business system that enables a company to collect, maintain and manage a complete list of all the components possessed by the company is known as asset management. The main objective of the asset management is to enable the company to manage the financial facets of the ownership, estimation of the costs of ownership, record of items on hand, spare parts, replacements, depreciations, maintenance and insurance. (Asset management: www.infobeagle.com) The concept of asset-liability management has different meaning in different fields. Normally the banks and insurance companies employ accrual accounting for practically all their assets and liabilities. They are required to take on the liabilities and to invest on the assets and by so doing the reorganize the assets and liabilities from the hidden potential risks involved. (Asset Liability Management: Contingency Analysis) The objective of the Asset Liability Management Resources is to entail analysis, instruction and guidance…

Black-Scholes model is essentially a formula used in the calculation of a theoretical call price for options. It is considered to be the fundamental model for pricing in the option market (Cretien, 2006). This model uses in its calculation the five main determinants of an option's price, which include stock price, strike price, volatility, time left until expiration, as well as risk-free, short-term interest rate (Hoadley, 2010). The computations executed by the Black-Scholes model result in prices that are close to actual market value as long as input variables are determined that are reasonably accurate (Cretien, 2006). A benefit resulting from the use of this model is that it provides traders with a means to compare market prices with alternative values while using different inputs (Cretien, 2006). The Black-Scholes model also assists in the prediction of movements in price for investments other than options by providing a way to compute…

Corporate Finance
s explained by Professor Watkins at San Jose State University, the binomial option pricing model is when a stock price over some period is presumed to go up by a certain percent or down by a certain percent. This leads to a formula whereby the current stock price is multiplied times one plus the percentage it could go down and then the same formula is done for the percentage it could go up. If a call option is in play or if the stock has interest that is risk-free, then the formula gets a little more complex (Watkins, 2014). Risk-neutral option pricing relies on something known as arbitrage. In this instance, all future outcomes are adjusted for risk and the expected asset values that results are calculated thusly. Once that is done, every asset can be priced accordingly. This is not the same thing as true real-world risk…

Capm, Dgm, APT
There are three primary means by which a company's cost of equity can be calculated. These are the capital asset pricing model (CAPM), the dividend growth model (DDG) and the arbitrage pricing theory (APT). Each of these methods has certain advantages and disadvantages. This paper will analyze these three models in the context of their usefulness in determining the cost of capital.

The first method, and the most popular, is the capital asset pricing model. At the core of the model is the assumption that the value of a firm's share is determined by the expectation of future returns. The firm's value is therefore determined by a combination of market risk and firm-specific risk. These elements, along with the risk free rate, form the core of the CAPM equation. The capital asset pricing model uses the beta, ?, which is the historic correlation of the firm's stock…

CAPM
The first scenario represents a diversifiable risk. The rate of inflation has an effect on the whole economy, but the nature and direction of that effect is something that will be different for each firm. Some firms may suffer more than others from the effects of a higher rate of inflation, depending on their business model, their capital structure and their strategy. In addition, inflation rates are a national phenomenon. It is easy to diversify beyond the borders of the United States. There are American companies that do over half of their business overseas. There are also ADRs of foreign companies that are traded in New York. It is easy enough to diversify out of the effects of even a broad-based economic factor like the inflation rate.

A major recession in the U.S. is something that might affect the whole market, but again how it affects each individual firm…

This in turn gives the financial professional better idea of the stock's risk behavior.
The equation used in this security market line relationship is as follows:

Mathis, CAPM, par. 3)

The measure of systematic risk is considered Beta or bi while E[Ri] is equal to the expected return on asset I and Rf is the risk-free rate. E[Rm] is the expected return on the market portfolio and E[Rm] - Rf is the market risk premium for the stock. Once the Beta is known then the risk and rate of return can be found.

APT is different because not only can forecast for the long-term, it can also work for the short-term scenario. This fact makes it the better of the two theories because it gives the financial professional more tools to assess risk and the rate of return. APT does this by using a model that captures all the data.…

Global Financial Strategy
Critical assessment of the proposal to raise capital locally rather than in the UK

In the analysis of the proposal of raising capital locally rather than in the UK, it is essential to consider four critical aspects: costs, risks, benefits/advantages, and limitations/disadvantages. In the presentation of this critical assessment, the focus will be on the four factors or aspect in order to offer reliable analysis of the situation.

Costs

In the process of raising capital locally rather than in the UK, the organization must incur several costs. One of the essential costs is the professional cost. This refers to the amount of money or financial resources paid to the legal advisors, auditors, and reporting accountants in order to execute the process of raising the capital effectively and appropriately. Another important aspect of cost is the trading cost. These are direct costs including the brokerage commissions and financial…

label slp 3 in section Session Long Project 'll estimate cost equity rate return company's shareholders 'require'. This important piece information top manager estimate important input effort determine action company add shareholders.
SLP 1 OPM 500

Wal-Mart is one of the greatest American companies and it has been received with both praises as well as criticism. The current endeavor nevertheless is more focused on the financial aspect of the organization, namely the cost of its equity. At a general level, the cost of equity is understood as "the return that stockholders require for a company" (Investopedia, 2011). In other words, it is the amount of money that the organization has to pay in order to reward the investments made by the shareowners.

The cost of capital is an important financial tool as it sits at the basis of efficient decision making. In other words, the cost of equity portraits whether…

equity at Facebook is to use the capital asset pricing model. The formula for CAPM is as follow:
Rj = RF + ?j [RM - RF]

The first step to determining the cost of equity is to gather the different variables go into CAPM. The risk free rate is the first such variable. The risk free rate reflects the rate of return that an investor can earn on an investment that has no risk The only investments that are deemed to have no risk are Treasury securities. This is because the U.. Treasury prints money, so there is zero risk that these will not be repaid. There is risk that the payment will not have the same real value, but it will have the same nominal value as expected.

According to the U.. Treasury webpage, a one-year Treasury bond carries with it a rate of 0.13%. This is the risk…

(Jabal Omar Development Corporation 2010)
Kuwait

Since 2008, the real estate market in Kuwait has been continually declining. The reason why is because the economy was largely depending upon oil revenues. However, in 2010 the sector began witnessing an increase in prices. This is because of the Kuwaiti government was aggressively promoting the tourism industry. As developers are expecting a strong increase in foreign direct investment, due to the governments push to expand the sector. As a result, holiday and residential areas in Kuwait are continuing to boom. (Finkelstein)

In the housing industry, there are large numbers of shortages that are affecting prices. What has been happening is the residential sector has been facing restrictions over the last several years, surrounding building permits. As the government was slow to endorse them, which created a rush on new areas that were approved for development. At the same time, the government has…

MT Equity
The beta for al-Mart, according to MSN Moneycentral, is 0.29. According to Yahoo! Finance the yield to maturity on a Treasury bond that is due 15-Mar-12 is 0.296%. e will assume a market risk premium of 7%. ith these figures, the cost of equity for al-Mart can be calculated using the capital asset pricing model (CAPM):

Ra = RF + ? (Rm -- Rf)

Ra = 0.296 + (.29)(7)

Ra = 2.326%

This cost of equity is lower than I had expected. In general, the cost of equity for a firm is fairly high. The reason why al-Mart has such a low cost of equity is that the company's beta is so low. al-Mart has very little correlation with the broad market, and is not very volatile. As a result, al-Mart's cost of equity is low, because it is much less risky than the market as a whole.…

Only eTrade and aterhouse make good comparables in terms of being in the same discount brokerage business. Full service brokers are working with different revenue streams and ancillary businesses that greatly reduce their effectiveness as comparables. aterhouse's relevance becomes suspect when you consider that they are no longer public. Their data is old - the beta of a discount brokerage in the telephone era is not especially useful to a decision about a discount brokerage entering the Internet era. The cost of capital for eTrade is 6.4%. As with Ameritrade they have no long-term debt and do not pay dividends. Ameritrade's cost of capital is going to be around 8%. Their borrowing cost is 8-9%, and we should take the lower figure to reflect that they have some equity, and that equity has thus far been free due to the lack of dividends.
Joe Ricketts should view the cost of…

ISK Management - CAPM and APT
Capital Asset Pricing Model and Arbitrage Pricing Theory

The contemporaneous business community is extremely competitive, meaning as such that the organizational leaders strive harder than ever to overcome the competitive forces. Virtually, they have to hire and retain the best skilled staff members; they have to develop and offer the best quality products and services and they must be able to raise the interest of a vast and large customer base. All these constitute competitive advantages.

Yet, another element which has to be granted the adequate attention is that of the management of assets. The specialized literature offers a multitude of definitions of the concept of asset, yet the underlying idea is basically the same. Stickey, Weil and Schipper (2009) for instance argue that an asset is "a probable future economic benefit that a firm controls because of a past event or transaction" (p.108).…

" Bhattacharya (1988). It is used to calculate the value of a company based on its total cash flow. (oss, 1988).
Bhattacharya (1998) states that this theory assumed that lower dividends will lead to reduced levels of new equity and this will bring about a balance between the debt and equity of a company. This is not ture for utilities companies and other monopolistic firms where new equities are rare.

For the "Current Examples" in our table, do we need to find specific company examples that exist today or have happened in the last 2-3 years? Or will it suffice to give a theoretical example of a measurement in a firm that fits the model.

For example, would this be OK.

Efficiency Theory Example

- Production returns based on shared, variable, and per unit costs divided by the total output of a factory in a given period of time.

Instructor…

The company seeks to align its core strengths with the Quadrennial Defense Review that sets the course for the country's security initiatives for the coming four years as a means to increase its share of defense contracts (2009 Annual Report). Thus, the company's strategic initiatives are driven by what it expects government defense policy will be in the coming years. As of the fall of 2009, the company did not believe that it had any major holes in its competencies or product offerings that it needed to address (Ratnam, 2009). This is perhaps why Northrop Grumman is focused on internal improvements -- it feels that the company's existing structure, businesses and strengths are sufficient to sustain its size and to build market share in defense contracts. The company has not indicated any desire to seek out new customers in its recent communications.
Policies and Practices

Northrop Grumman's capital structure has…

Business
Management

For most of us, dealing with money has been altered by technology. Most of us use money out of ATM's or we pay bills with online banking just as easily as we change channels on a television. Obviously printing presses and paper cutters create our physical money, but how is the idea of money really created? Do banks and laws really make the idea of money? This essay evaluates the efforts of the Federal eserve System, often called the Fed, in terms of regulating the money creation of financial institutions?

Congress passed the Federal eserve Act near Christmas in 1913 and that established the Federal eserve Banks and also created a more elastic currency and established new legal controls over the commercial banking industry. The Federal eserve is the central bank of the United States and is made up of 12 regional Federal eserve banks that are overseen…

Ryanair
Introduction & Recent History

Ryanair is a leading discount airline based in Dublin. The company is known for its cost leadership strategy that has included some attention-getting publicity stunt ideas, and some that the company has actually implemented. The company is profitable, earning €544 million in the first half of fiscal 2012 and €400 million in fiscal 2011. The company flies low-cost scheduled flights around Europe and to nearby destinations in the Mediterranean regions. Ryanair was first mover in its industry, but now faces competition from a number of other budget carriers.

In its reports, the company outlines some of the factors that have an impact on the financial statements. One of its major hubs is in Dublin, and that airport has increased fees substantially of late, making that airport less viable for all airlines. Fuel costs have risen 37pc in the past six months, squeezing the company's margins.…

If this investment was financed entirely with debt, the new capital structure would be 67.2% debt and 32.8% equity. If this investment was financed entirely with equity, the new capital structure would be 30.5% debt and 69.5% equity.
One rule of thumb for making such a decision is to match the asset type with the financing. Therefore, an asset that is expected to have a service life of five years would be financed with a five-year bond issue, so that the cash flows from the asset can be used to cover the costs of financing. In this case, the asset life is not known, so any financing type can be used.

Internal cash is not possible because the firm likely does not have $10 million in cash if it only has $17.2 million in assets and $17.5 million in annual revenues. A debt issue will leave the firm with a…

isk, eturn and Their Evaluation
isk & Performance Indicators

Since this is a small business, therefore raising equity capital through public stock issue is less likely than debt or whatever form of paper issued to angel or venture investors. Therefore while a larger, publicly traded firm would consider the return on equity version of the short form DuPont equation, a small, more closely-held concern would focus on return on assets (OA). If OA is net income over sales times sales over total assets, i.e. net income over total assets, then any action that could increase the numerator, total income, or shrink the denominator(s) should increase OA compared to past performance within the firm and the competition outside it. If competitors all use the same (best) plant, then maximizing efficiency of the same assets through process or brand innovation; input cost reductions, and also financial performance like minimizing payables days over…

The major difference between standard deviation and the beta is that the former measures the volatility against the asset's own mean, whereas beta measures the asset's volatility against the market. Standard deviation, therefore, allows the user to understand the asset's specific risk on its own, and can use this information to compare returns against historical average returns. This is valuable because the risk profile of an investment can be significantly different than that of the market, so the returns will be expected to be significantly different as well.
Standard deviation can also be used to measure against other means, for example against historic market returns. However, the beta coefficient is more effective as a measure against the market. Standard deviation and beta are both often used as measures on their own, without any model, because they communication the information clearly. In the capital asset pricing model, for example, the systematic…

1. Introduction
Firms may be successful by satisfying customer needs, but their ultimate accountability for financial performance is to the owners of the firm. Actions undertaken by quoted firm will usually have the direct, or indirect, aim of generating revenues and profits for the firm, and therefore the owners (Tarraf, 2012). When investors assess a potential investment they will look at the financial performance of a firm, assessing the past performance, with consideration of the way current and expected strategies will impact on the organizations performance, in the context of the expected macro-environmental conditions (Bodie, Kane, & Marcus, 2014). The investors will assess the share price of the firm, being more likely to make a purchase if they believe the value of the share is likely to increase with a significant amount of the assessment based on assessments of past performance (Hens & Rieger, 2016; Nellis & Parker, 2006). This…

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 of 2015 fiscal year. On February 2016, Apple recorded $521.3 billion worth of market capitalization. While Apple designs the bulk of their products in the United States, the company's manufacturing plants are located in China. Apple also operates in Europe, Japan, Canada, and Latin America. (Apple Inc. 2015).

Board of Directors

Apple Inc. Board of Directors is overseeing by the company CEO (Chief Executive Officer) and other competent senior management. The Board oversees the day-to-day operations of the company…

Black & Decker
Forecasts

Since the merger with Stanley, Black and Decker has seen a steady increase in its revenues, gross profit and net income. The different elements of the new company are still being integrated, underperforming divisions are being shed, and synergies between the different components are still being developed. As the company continues to make internal improvements, it can expect that it will continue to grow both its top and bottom lines. It is reasonable to expect that over the next 2-3 years, ongoing internal improvements will help to improve margins, all other factors being equal. The post-merger improvements in the percentage of SGA expenses to revenue should continue in the short-run, albeit at a slower pace. Likewise, internal factors are likely to be responsible for at least a modest growth in income, as marketing synergies in particular emerge.

External factors are also critical to the forecast. The…

Accounting and Finance
Henkel AG is a multinational company focusing its brand and technologies in three business areas that include Beauty Care, Laundry & Home Care and Adhesive Technologies. Established in 1976, the company holds its global market positions in both the consumer and industrial products with well-known brands that include Lactate, Persil, and Schwarzkopf. Henkel's headquarter is in Dusseldorf in German and the company has over 47,000 employees globally. Typically, the company is considered among the most "internationally aligned German-based companies in the global marketplace." (Henkel 2012).

Objective of this paper is to use various financial models to carry out financial analysis and valuation of financial Henkel AG.

Valuation Model

One of the methods to carry out the valuation of a company is to use enterprises discounted…

The specific makeup of this potfolio is uncetain, but its chaacteistics ae elatively set.
The othe component of the potfolio is the isk fee asset. What the constucto of the ideal potfolio will do, in essence, is detemine the blend of the optimum isky potfolio and the isk fee asset, based on the investo's own isk toleance. The highe the isk toleance, the moe of the isk-fee asset would be included in the potfolio. The isk toleance -- and esulting pecentage of isk-fee asset -- would push the potfolio up and down the efficient fontie. This is based on the fact that the isky potion of the potfolio was aleady the optimum isky potfolio.

The moden potfolio theoy that Makowitz developed has been efined ove the yeas, but the basic tenets suvive. A potfolio with sufficient divesification can eliminate all fim-specific isk. The objective of doing this is to build…

risk and return for an investment portfolio that includes five asset categories: stocks, bonds, mutual funds, options, and precious metals. The purpose of diversified portfolio investment is to maximize portfolio expected return for a given level of risk, or to minimize risk for a specific level of expected return. This paper reviews mathematical formulae for modeling risk and return which provide a rationale for investment strategies and portfolio management. The paper also discusses risk and return objectives and expectations, along with investment risk profiles.
Risk vs. Return Measurement

In an ideal world, the typical investor would select investments whose attributes include high returns coupled with low risk. In reality, there are few of these kinds of investments available, consequently financial managers have gone to great lengths to develop methods and strategies that allow them to come as close as possible to selecting the ideal investment. One such financial theory for…

The liabilities are subject to reserve requirements, however. This means that the bank cannot have more financial assets than it has liabilities. So debt utilization is an entirely different animal in the banking industry than it is in conventional industries.
Therefore, typical debt utilization ratios are of little relevance. Interest coverage is tied to liquidity, and is therefore not measured for banks. The debt-to-equity ratio is measured, however. For ells Fargo, this is 3.01. For Bank of America it is 3.97. The industry average is 3.28. The significance of this metric in the banking business is that the higher the ratio, the riskier the business. Another measure is the leverage ratio. This is at ells Fargo 12.0, versus 9.7 at Bank of America and 14.7 overall. Thus, both of these companies are less highly leveraged than the industry as a whole. ells Fargo has a lower debt-to-equity ratio indicating lower…

market capitalization of 23.011 billion, oeing is the nation's largest producer of commercial aircraft and the world's leading aerospace company. It operates in four principal segments: Commercial Airplanes, Military Aircraft and Missile Systems, Space and Communications, and oeing Capital Corporation. As the world's market for air travel fluctuates with the risk of war, so do oeing's revenues. However, as the United States moves towards a footing that may include future wars against perceived 'terrorist states,' oeing stands to gain from military aircraft and weapons production. As such, it intrigues investors as its market is a careful reflection of the front pages of the world's newspapers.
To successfully evaluate oeing's stock, we must analyze its fundamentals and the performance of comparables, as well as market performance. A projection of future revenues is necessary, along with an estimation of the cost of capital with which oeing produces. These allow us to provide…

Thus, a broad market index is the best available comparison for the time period studies.
CAPM

The capital asset pricing model is appropriate for this particular event study. The event is an acquisition by Freeport McMoran of an asset, Phelps Dodge. Many mergers are made for operating synergies, but in this case the move was made for different strategic reasons. Phelps Dodge knew Atticus was going to sell their stake and wanted to make a pre-emptive strike against that. For Freeport, the move was made to more than double their size. They went from being a medium-sized mining firm to being a major world player. In the process, they removed themselves from the position of being a takeover target (the BHP rumors never amounted to anything). The merger was therefore done for long-term reasons more than anything else. Thus, its effectiveness cannot truly be measured until long-term returns have been…

03)(7) = 9.26%. A Target four-year has a yield of 4.757%, which corresponds with the higher risk level (A compared to AA) that Target represents over al-Mart. This will be used as Target's cost of debt. The weightings of debt and equity are 69% debt and 31% equity. This gives us a weighted average cost of capital for Target of:
(4.757)(.69) + (9.26)(.31) = 6.15%

Target represents a higher risk level compared to al-Mart. This is reflected in the bond rating, but also is indicated by the higher degree of leverage. Additionally, the overall stronger financial performance of al-Mart hints at a company that should have a lower cost of capital.

11) Appendix E shows the charts of each of these companies for the past three years (MSN Moneycentral, 2009). al-Mart's stock lost some value in 2007 at a time when Target's stock gained value. They tracked each other for…

Capital Asset Pricing Model (CAPM) is one of the models used in calculating the cost of equity. ecent reports have indicated that this model is a major approach in the calculating the cost of equity, which is in turn used to determine the weighted average cost of capital (WACC) for valuation of equity and investment appraisal reasons. This model was developed as the first rational framework for determining how an investment's risk should affect its expected return, which is one of the fundamental questions or issues in finance. Capital Asset Pricing Model (CAPM), which was developed in early 1960s, is based on the notion that not all risks should have impact on prices of assets. The significance of this model is demonstrated in its provision of a formula that calculates the expected return on an investment (or security) depending on its level of risk. In this case, the expected return…

Fama French
Difference between FF and Markowitz Portfolio Theory

Fama-French Three Factor Model

Eugene Fama and Kenneth French designed Fama-French three factor model to describe stock returns. Fama -- French model uses three variables. They added two factors to CAPM:

r = RF + ?3 (Km -- Rf) = bs . SM + bv . HML + ?

r = portfolio's rate of return,

RF = risk-free return rate,

and KM = return of the whole stock market.

Over 90% of the diversified portfolios returns are explained by the Fama-French Three Factor model. It further measures investment returns with academic and mathematic approach. Consequently, the "small cap" stocks and stocks with a high book-to-market ratio provide a more return than the general market. For Fama and French, high returns are a reward for high risk, which means if returns increase with price, stocks with a high price ratio should be…

represents a diversifiable or an undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning.
There's a substantial unexpected increase in inflation.

The big issue with inflation is that the same amount of cash becomes worth less. For example, $100 in 1980 was worth a lot more than $100 is now. Some inflation is expected, normal and actually a good thing. However, deflation and stagflation are both less than desirable. As far as investments, whether massive inflation is a bad thing depends on the investment in question. Since variances in inflation/deflation smooth out over time, the bigger issue is usually the fact that returns on investment, revenues and so forth will be inflated in an inflation-heavy period as compared to times when inflation is not an issue. However, people that are on fixed incomes and invest are usually hit quite hard by inflation because their fixed…

Because Ameritrade's Initial public offering was in March of 1997, the time series is to short for estimating beta (August 1997), as the provided data will give inaccurate results. That's why in order to estimate beta for Ameritrade correctly we can refer to the finance data of the comparable companies. It means that we should choose companies, which have cash flows with similar risk indexes, as these companies will have same asset beta indexes. For running such test 14 different firms in 4 industries (investment services, Internet services, discount brokerage, internet) were chosen: A.G. Edwards, Bear Stearns, Lehman Brothers, MSDW, Paine Webber, . James, Merrill Lynch, Mecklemedia, Netscape, Yahoo, Charles Schwab, E*Trade, Quick & eilly, Waterhouse Investor Services.
We can use the following formula to calculate beta for the firms above:

In order to estimate reliable results we should choose firms, which specialize in brokerage services. Discount brokerage firms get…

The first component is as follows: Net Margin = Net Income/Sales. How much profit Abbott laboratories makes for very $1.00 it generates in revenue, and the higher a company's profit margin the better. The second component is as follows: Asset Turnover = Sales/Total Assets. The amount of sales generated for every dollar's worth of assets. This measures Abbott's efficiency at using assets, and again, the higher the number the better. The final factor of the Du Pont analysis is as follows: Leverage Factor = Total Assets/Shareholder's Equity. The higher the number, the more debt the company has. Abbott's Du Pont analysis is computed using the following equation:
In this case, for the end of 2006, Abbott Laboratories reported a net income of $717 million dollars, sales of $22,476 million, total assets for 2006 of $36, 178 million, and equity of $14,054 for 2006. Placing these figures into the equation above…

Wal-Mart cost of capitalSlide 1: The WACC is the weighted-average cost of capital. The capital structure of a firm consists of two main components debt and equity. Wal-Mart does not have preferred shares, so they can be excluded from this calculation. The cost of equity and cost of debt are different, so the weighted average cost of capital is the weighted average of the cost of equity and the cost of debt, as illustrated in the following formula:Slide 2: Equity versus DebtThe choice between equity and debt reflects the trade-off between a number of different factors, including risk, control and access to capital. The risk characteristics of equity and debt are different, which is the main reason that they have different costs to the company. Equity payouts are subordinated to debt payouts, because debt payouts are done on a pre-tax basis and equity pay-outs are done on an after-tax…

Amazon, and whether the company should approve the project or not. There are a number of different steps leading to this decision, and it is those steps that make up the bulk of this paper. The first step is that the capital structure of the company needs to be determined. This is going to contribute to a weighted average cost of capital calculation later on. There are two different ways of calculating capital structure, the book value method and the market value method. Both are calculated, but eventually it is the book value method that is used.
The next step is to calculate the weighted average cost of capital. In this section, we already have the weights, but we need the cost of debt and the cost of equity. These are both analyzed using market information for debt and equity alike. Three different methods of calculating the cost of equity…

capital fall if financial markets are no longer segmented? What evidence is there of this effect?
Up until the mid-1940's markets where knows to be restrictive in cash flow movement, this in combination with tax and transactional barriers on ownership by foreign entities meant that equity markets were not developed. They were in fact marked with low liquidity, not enough regulation and inconsistent disclosures.

If capital markets are segmented, then investors can only invest domestically. This means that the market portfolio (M) in the CAPM formula would be the domestic portfolio instead of the world portfolio.

This equilibrium had banks, securities market and capital markets as the primary source of finance. The localized source of finance meant that domestic investors were they only players in the market with most shares, resulting in high cost of capital.

1970's brought on the liberalization of markets in the developed countries which resulted in…

Franchise
South Coast Railway is evaluating a proposal for a five-year franchise from the UK government. This proposal would be to operate a high speed commuter rail service from 2018 to 2022. The following report will examine the financials relating to this decision, and the decision-making heuristic.

Decision-Making

The decision at hand is essentially a capital budgeting decision. There are a few different ways to evaluate a capital budgeting decision. The most common is the net present value (NPV) technique. This relies on discounted future cash flows to make the decision. The principle behind the use of discounted cash flows is that money earned today can be reinvested, and because of that, a pound earned in the future is inherently worth less than a pound earned today. The value of future money decreases over time. The NPV method discounts those future cash flows back to present value, and compares then…

Valuation
There are a number of different factors that contribute to a stock's valuation in the market compared with the financial statements. One fundamental difference between the two is that the book value reflects past performance while the market reflects future performance. Book value of the company's equity is determined by the past profit performance of the stock and the amount of debt that the company has. The market value reflects the investor's expectations of the future cash flows that will accrue from owning one share of the company's stock (No author, 2011).

Valuing a firm's equity can be done using a number of techniques, each relying on different assumptions. The first of these is the Gordon growth model (or dividend discount model). This model assumes that stocks are valued based on their intrinsic value alone -- that the value of a company's stock is based only on the known…

Mobile Telephony
Cellular service was launched in UK in 1985. Cantel and affiliates of Mobility UK were licenced to operate at 800 MHz. Personal Communications Services (PCS) operating at 1.8 GHz was licenced in UK in December 1995 with two new players, Clearnet and Microcell each receiving 30 MHz of spectrum. Mobility UK affiliates and Cantel each received 10 MHz of new spectrum. PCS service was launched in late 1997. Today, a wide variety of national and regional licenced wireless carriers, along with numerous resale partners, provide wireless voice and data services covering more than 99 per cent of the UK population:

O2

Petro UK Mobility

chatr wireless

Primus

Cityfone

Public Mobile

CityWest

Rogers

Dryden Mobility

SaskTel

EastLink

Sears Connect

Fido

7-Eleven Speak Out Wireless

Ice Wireless

Sogetel

KMTS Mobility

Solo Mobile

Koodo Mobile

TBayTel

Lynx Mobility

Telebec

MTS

VODAFONE

Mobilicity

Videotron

Nexicom Mobility

Virgin Mobile

NorthernTel

Wightman Telecom

NMI…

The market structure of Turkey is quite different from that of the UK. The cultural composition of Turkey is not a guarantee of making proportional sales. The reasons for the low performance of the company's product could as well reverberate in Turkey. If the UK market that the company is accustomed to has failed to yield expected returns, the viability of the company's product in Turkey is doubtful. However, considering the expectation of government grants that will offset the company's tax liability; the venture assumes a would-be profit generator. The company cannot bank on this tax relief as a basis to carry on with the proposed relocation to Turkey. The reason for that being that the amount accruable from the tax relief is on a portion of the entire expenditure of the company. The long run effect of this is still profitable to the company.
Based on the outlay of…