Essays on Capital Asset Pricing Model

Galaxy Skis has a tough time ahead of itself when it comes to using the international financial market. This is because it is looking at building a plant in China, where the government frequently supports manipulating its currency in order to maintain a competitive edge over other countries in terms of resource and labor cost (Catalan, 2010). This can be problematic for a company that seeks to do continuous business in the country due to the fluctuating market system and exchange rate, though analysts claim that China’s actions will not have long term effects on the flow of ...

Calculating cost of equity using Gorden Model:

In the first section of this paper, we will calculate the cost of equity of Nike Inc. using the Gorden Model as part of which, recent dividend payment will be used for estimating the cost of equity multiple. Followed are the calculations: Value of Stock: Current Dividend(1+Growth Rate)/ (Required Rate- Growth Rate) 58.02= 0.62/( Required Rate- 0.1209) = 13.15%

Here:

Growth Rate= Compounded Annual Growth Rate for past 5 years = (0.62/0.35)0.20- 1 = 12.09% Therefore, following Gorden Model, we found that the cost of equity for Nike Inc is 12.09%. However, because of the limitations of Gorden Model, ...

Galaxy International operates in a niche market; this is because skiing is only possible in very specific areas, and only a limited number of the population skis regularly anyway. Despite this, the company has performed outstandingly well to be achieving the level of sales with a small staff. This being said, Galaxy International needs to raise capital quickly and in an efficient way to successfully continue expanding to fully capture its full market size. By offering a unique product that is flexible yet tough, Jeremy is likely to continue to increase the volume of his sales and therefore the ...

1. An investor does not need to make a decision which portfolio to choose when a risk free asset is included. There is now only one tangent portfolio he can choose. Explain this statement with graphs analysis. The line of possible portfolio risk and return combinations given the risk-free rate and the risk and return of the portfolio of risky assets is called capital allocation line(CAL). For an individual investors and under the assumption of CAPM model that each investor faces homogeneous expectations, the best capital allocation line is the one that offers the highest expected utility in ...

“Diversification eliminates unique risk. But there is some risk that diversification cannot eliminate”

Diversification of portfolios is one of the effective ways to minimize the risks and increase the returns. However, it is acclaimed that there are certain risks that cannot be eliminated. These risks are called market risks that cannot be overcome through diversification of the portfolio. There are several theories that stress that the diversification of portfolios should be used to bring stability in its returns and lessen the risks. Systematic risks or market risk emerged because of the changes in the economic cycles of the market that are influenced by various factors and activities taken place in the economy ( ...

Introduction

The purpose of business is to obtain the maximum revenue at the lowest cost of capital in a competitive environment. The realization of this goal requires of comparing the size of the capital invested in the production and trading activities with the financial results of this activity. However, in the implementation of any kind of economic activity there is objectively a risk of loss, the volume of which is due to the specifics of a particular business. Risk is the probability of losses, damages, shortfalls of projected revenues, profits. Losses that occur in business activities can be divided into ...

Introduction

The one of the most important questions for investors is how the expected return of an investment is affected by its risk. The answer to this question gives the Capital Asset Pricing Model (CAPM). It was developed by W. Sharpe, J. Linter, J. Treynor and J. Mossin in 1960s. The idea of CAPM is that there are a number of risks that have an impact on the asset prices. It is natural to assume that an investor should receive high reruns from the high-risk investments. The price of such assets should be relatively high in order to compensate a ...

Introduction

In this assignment, we will discuss and describe the application of statistics and probability theory to a real world problem. Our task is to evaluate and summarize the performance of a given stock (y). This report consists of the four parts. The first part is descriptive statistics of the given data between the two time periods and between the given stock and the Standard & Poor’s 500 index. Next, a hypothesis test will be performed in order to examine the performance of stock (y). The third part of the report includes Capital Asset Pricing Model estimation by the mean ...

Introduction

Graham and Harvey surveyed about 4,440 firms chief finance officers, and only 392 reviews came back. Large enterprises rely primarily on present value methods, capital structure and capital asset pricing models whereas small businesses likely use the payback period technique (Graham 12). Companies are more concerned about sustaining financial flexibility, healthy credit rating, stock appreciation, and EPS (earnings per share) dilution, especially when the entities are issuing equity. Little evidence was also found that organizational executives have a great concern about asymmetric information, personal taxes, free cash flows, and asset substitution. There is also some support for trade ...

Question 1: Olter’s Beta coefficient

Olter’s Beta can be determined using the Capital Asset Pricing Model. The required return on the average stock is the market return while the average return on Olter’s stock is Olter’s required rate of return. Beta = (Expected return – Risk-free rate)/ (Market return – Risk free rate) = (13-6)(13-6) = 1.0

Question 2: Effect of Beta coefficient on stock price

Beta is a measure of risk and gives the variability of a stock’s return (price changes) in relation to the variability of the overall market. Since it represents the stock’s risk, Beta influences the prices of stocks. Under the Capital Asset Pricing Model, Beta is ...