Essays on Market Risk

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, ...

This paper presents profitability analysis of two companies listed and active in the London Stock Exchange. The two companies selected for the analysis include Premier Oil PLC trading under the ticker symbol PMO and Genel Energy PLC falling under the ticker symbol GENL in the exchange. The two companies fall under the Oil and Gas Producer main market segment of the London Stock Exchange. At the time of presenting this report, GENL traded at a price of 97.50p with a 52-week range of 71.75p to 441.00p. On the other hand, the MPS of Premier Oil PLC was at 63.50p ...

“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 ( ...

Community bank is an independent, small and locally-owned commercial bank, which operates and obtains its funds solely from the community, where it is based. Community banks focus on providing traditional banking, derive deposits locally and mostly make loans to local businesses. It is widely known that today community banks provide most of the loans to our nation's small businesses and are an important financial resource to small cities. Because of that and because of the fact that they have knowledge of their local community and their customers, they are called “relationship” banks. They base their credit and loan decisions ...

Financial Institution Supervision: Insurance Companies

Introduction Insurance, in the simplest terms, means a transference of risk from the insured to the insurer. Around the world, individuals, families and businesses take advantage of the provisions of insurance so as to protect the possibilities of catastrophic losses that could occur due to loss of life or failure of a business. Over a period of time, the insurance industry has matured to throw up a multitude of products, and has grown into a multibillion-dollar industry. The management of risk is the key to the operations of the insurance industry. While insurance agencies have necessary internal checks and ...

Value-at-Risk

Introduction Risk assessment is essential in portfolio management. A portfolio manager has the duty of maximising returns of the portfolio of the assets for each level of risk. Alternatively, a portfolio manager should minimise the risk of the portfolio at any level of return of the portfolio. Several models are used in assessing the risk involved in a portfolio of investments. Value-at-risk is widely applied in determining portfolio risk. We explore the concept of value-at-risk and its usage in portfolio management.

It is a model that measures how much the value of a portfolio could fall over a specified ...

Assignment : Essay based on Chapter 5 of “Beggar thy neighbour”.

Assignment number

Assignment –A (1238 words) Essay-1 Question: The economic consequences of lending at compound interest resulted in loss of productive yield of the society. How finance dominated over economics and politics by using this concept of interest (Geisst 193)?

Introduction

The question given above poses a mandatory evaluation of the harmful impact of the compound interest based lending and consequent ease of loans for the people of America. The author, Charles Geisst, used the viewpoint of John Maynard Keynes to explain that the American society was so possessed by the idea of easily availing the loans using compounded ...

Credit Risk Management Analysis

Credit risk emanates from the peril of loss of principal or shortfall of a financial reward stemming from a borrower default to repay a loan obligation. The failures to honor a contractual agreement of a loan results of a wholesale credit risk. When a borrower envisages to use future cash flow to pay a current debt credit risk will eventually arise. Then the savers will assume credit risk by way of interest payment from the borrower or issuer of the debt obligation. The wholesale credit risk, therefore, emanates from the defaulters of debt obligation that have been acquired from ...

**Business 4465**

Be sure to put your name and student number at the top of the email attachment. Your document must be less than 10 typed pages. Please read the questions carefully. Write all you answers in a word document, label all questions carefully. The best answers are those that answer the questions well and concisely using material within the scope of the course and not irrelevant material from other sources or from the internet. Answers that are beyond the scope of the course will receive no marks. Answers that are not written in the own words of a ...

Part One

Risk There is no standard way to define risks. However, one of the definitions of risk is the probability that the return on an investment will be lower than the expected return (Business Dictionary, n.d.). Examples of risk include business risk, transactional risks and exchange rate risk.

Beta

Beta is a measure of systematic risk of a stock. The value measures the volatility of the stock compared to the volatility of the market (Forbes, n.d.). The value of Beta can be either positive or negative while the beta value of the market is always one. As such, in interpreting the ...

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 ...

Risk is defined as uncertainty in broad terms. This uncertainty can be due to a large number of factors, which depend on the type of risk. Some of the common factors which result in this uncertainty can be changes in input parameters, miscalculation of parameters etc. (Kuritzkes, Schuermann, & Weiner, 2002). Risk can result in large and unexpected losses and can really hurt the profitability of companies. However, risk is not always bad and little bit of risk can lead to better financial results. However, the relationship between risk and better results is a lot more complex and depends on ...

ABSTRACT

The aim of this dissertation is mainly to analyzethe risk in the New York Stock Exchange using Statistical aspects and the computation of Value at Risk. The technique of Value at Risk or Value at Risk (VaR) is a methodology to standardize the calculation of the various risks that occur in a business e.g. banks, stock exchanges and corporations. The risk is defined as the probability of obtaining a result different than expected, the factors that will depend on the position of the entity, the risk factor under consideration and the time of calculation. Thus, the VaR seeks to establish quantitatively the ...

Business

Melbourne is located in the State of Victoria, Australia. It has the highest population in the State of Victoria. Melbourne has a much diversified economy which is characterized by a well developed infrastructure system, high technology, tourism, good logistics and transportation activities. Due to the presence of a good economy in the city, the business of selling food would do well. High population in the city would create a high demand for the product. However, there are risks which may act as a challenge in selling of the food and beverages. The risks and the mitigation measures are discussed below.

Financial risk involves ...

Abstract

This report includes the example of Deutsche bank in which the bank is accused of publishing a poor audit report with false figures and inadequate material to made analysis. The paper talks about the importance of the Risk, risk management, disclosure of the risk and the ways to disclose the corporate risk to decreases the impact of it.teh report includes the way through which the display of the information in the report affects the performance of the company. There are many ways through which good reporting can be achieved with even poor digits. The importance of the discloser in the ...

Introduction

In a classic financial world as predicted by Modigliani and Miller (M&M), the risk management should be irrelevant. When there are no information asymmetries, taxes or transaction cost involved, hedging will not add any value to a firm because shareholders or companies can diversify their portfolio in such a way that their overall risk will be totally hedged (Lin and Chang 2006). However, the real world is far from the Modigliani and Miller model. In practice, we see imperfections in the financial market. This imperfection may actually create a rationale to reduce the volatility of earnings for a firm through hedging.

Many empirical ...

Introduction

British Telecom and Vodafone are two giants in the telecom industry. After the financial burst of 2008 in the US Economy and the financial troubles in Europe, the telecom sector got badly impacted. In fact the whole sector instead of growing has slid into a negative growth which has affected almost all the telecom companies. British Telecom and Vodafone are trying to diversify their portfolios by making efforts to come up with innovative product packages to fuel growth. So far the initiatives have not shown much improvement in the results. In such conditions it is becoming very difficult for those ...

Market risk is the uncertainty in the returns that an investor has in the market due to macro-economic factors that cut across all the assets in the market. Market risk can also be defined as the likely-hood of an investor to incur losses in the portfolio he holds in the market that is caused by the factors that affect the financial markets performance. Market risks have an effect on the stock prices of shares and investments. Their occurrence cannot be ignored as it has far reaching effects on the investments of the people.

An example of a market risk is ...

Risk Management

Risk management is the process of identification, analysis, and mitigation of the investment decision-making uncertainty. The risk management happens anytime the investors or fund managers analyze and attempt to count the potential for losses in investments and do the proper action with the risk tolerance and investment objectives. If there is an inadequate risk management then it results to severe consequences both the companies and the individuals. Risk management determines the existing risks in the investments and handles the risks appropriately with the sets of objectives. In addition, risk management is concerned with the preservation of the assets and ...

I. CAPM Model

Capital asset pricing model (CAPM) is a model in finance that aims to explain the relationship between expected return and risk and formally represents the tradeoff between risk and return. It stipulates that a return of any portfolio or a security is a sum of the risk free security and a risk premium. This relationship can be expressed through an equation Rm = Rf + β ( Rm – Rf), where

Rf = risk free rate β = contribution coefficient of the stock to a diversified portfolio Rm = expected market return.

Here the risk-free rate is a theoretical return that is generated by an investment with ...

- Evaluation of the Company’s Objectives

The corporate objectives of Aztec Catering, a company providing catering services to businesses, schools, colleges, hospitals and retirement houses in the United Kingdom are the following:

These corporate objectives of the company require substantial work to refine, extract and direct the company towards profitability, sustainability and growth. The first step in refining the corporate objectives of the company is to be familiar with what a corporate objective is. Faucett (2012), defines corporate objectives as ”statements of intent that provide the basic direction for the activities of an organization in pursuit of its mission.” This means that a corporate objective is a broad, ...

Introduction

The decisions that the management makes regarding capital investment and financial management determines the success of any corporation. In essence, the management should make the investment, financing, and dividend decisions carefully to facilitate the maximization of the shareholders’ wealth. Ideally, sound investment decisions ensure that the firm utilizes the existing investment opportunities well. Additionally, sound financing decisions make sure that the firm has necessary sources of fund to use in its investments. What is more, sound dividend decisions ensure that the company retains enough earnings to distribute to the shareholders or use in future investments. The decisions about the ...

Analytical Framework

Section-A There are two different companies which have been taken into consideration for the analysis and the names of the companies are Royal Dutch Shell and Endeavor International Corporation.

Net Present Value Analysis

Net present value (NPV) is a financial tool that is deemed as the difference between current value inflows and outflows. Generally, it is used for calculating budgeting to analyze the probability of an investment on any project that. It is required to analyze the NPV and IRR on the basis of two years like 2012 and 2013. The NPV of Shell Plc. is -250,386 $ while it is, -1, ...

Capital Asset Pricing Model

The primary role of capital market is allocation of ownership of the economy’s capital stock . Capital market theory extends portfolio theory and develops a model for pricing all risky assets. Capital asset pricing model (CAPM) allows determining the required rate of return for any risky asset. CAPM offers powerful and intuitive pleasing predictions about how to measure risk and the relation between expected return and risk. It is widely used in application such as estimating the cost of capital for firms and evaluating the performance of managed portfolio . CAPM has been the basis for calculating the required rate of ...

I would ask Peter Lynch a question on the weighted average cost of capital (WACC). The reason is that it is used to calculate the firm’s average cost after all the tax has been deducted. In addition, WACC is used in discounting cash flows for calculation of NPV and effectively the valuations for business analysis and investment.

A corporation has one million shares of common stock currently trading at $30 per share. Current risk free rate is 4%, market risk premium is 8% and the company has a beta of 1.2.

It also has 50,000 bonds with of $1,000 par paying 10% coupon annually maturing in 20 years currently trading at $950.

The tax rate is 30%. Calculate the weighted average ...

Introduction

The report is prepared with the objective of conducting the financial analysis of Domino Pizza Enterprise Ltd that is listed on Australia Stock Exchange under the ticker symbol of ‘DMP. The report carries great significance for us to attain the knowledge of financial analysis and how the financial ratios and other multiples can affect our investment decision relating to a company. To simplify the analysis and to facilitate the reader, we divided the report in multiple sections relating to ratios, intrinsic value calculation and calculation of cost of capital.

i)Liquidity Ratios: i)Current Ratio: Current Assets/ Current Liabilities 2012:74/52= ...

Risk-Adjusted Ratio

Standard Deviation: In finance, standard deviation is a tool for statistical measurement of volatility in the stock returns. Higher the standard deviation of stock, more is its tendency from its expected returns. Hence, the investor has to face high risk if he invests in that particular stock and will demand higher return for taking high risk.

Beta:

A standard measure for market risk, Beta measures stock volatility in comparison to the market. For Instance, since the market portfolio has Beta of 1, any stock with Beta value of 1 means that it will move with the market. Similarly, if a stock ...

Introduction

It’s been over two decades that the agenda of the deregulation was adopted across nations, yet till this day regulation of the telecommunications sector continues to pose challenges. Only a few countries has been able to work out viable models of regulation of this sector while many countries still have public owned telecommunication systems (Grote, 2006). What remains a challenge in bringing about effective competition is the cost and economies of scale of incumbent networks. Hence empirical evidence shows no clear trends of changes in incentives vis-à-vis changes in the regulations on the sector. The US telecommunication sector ...

Regression Results

Discussing Stock Risk Here, we have used Beta as a measure of stock risk arising from general market movements. The above results indicate that on the basis of 2 year monthly returns, the beta of Coca-Cola is 0.92. This indicates the stock returns are marginally less volatile than the market/less than perfectly correlated to the market return as the beta multiple is less than 1. In addition, we also witness the R-Square multiple of 0.31. This indicates that of the total risk embedded in the Coca-Cola Stock, 31% is the market risk while the remaining risk is diversifiable ...

2.1. There are two types of risks, known as systematic risk and unsystematic risk. Systematic risk is the one that cannot be mitigated with the help of diversification and strategies; however unsystematic risk is the one that can be mitigated with the help of effective strategies. In terms of quantification, there are three different aspects that are integral known as market risk, credit risk and operational risk. In this particular assignment, all of the analysis will be based on the market risk and its exposure. It has been originated through the Forward and Future Contracts (Christoffersen and Mazzotta, 2004). ...

INTRODUCTION

The real estate market is cyclical to the economic movement (Gray, 10). This relationship results in the movement of the real estate market in a similar pattern as that of the economy. With this pattern at work, the economic downturn results in having direct impact on the real estate market performance. Dubai is one of the most important states of United Arab Emirates. This report has focused on the major factors that have influenced the real estate sector of United Arab Emirates, including the impact of 2008 economic crisis. While discussing prior crisis condition of the industry, report has illustrated ...

U.S. Department of the Treasury shows us that the value of risk-free rate was 3.05% on May 30, 2014 (U.S. Department of the Treasury, 2014). US Treasury bills’ yields were chosen as the source of risk-free rate, because virtually these financial instruments do not have any risks (except for sovereign). They are backed up by the Government of the USA. Therefore, even if default occurs, there is always a possibility to print out more money. As for the maturity of US T-bills it should coincide with the maturity of financial instrument that is considered (in this case IBM stocks), which ...

Assignment 3: Risk Management Workshop

Finalized: November 16th, 2013 Introduction There is always a positive relationship among organization and productivity; in fact whatever an organization does is merely to enhance their productivity (Damien McLoughlin, 2010). Different authors have come with different ideas regarding organizations and their objectives and most of the authors stated that, organization is basically a place, wherein people belong to different demographics, work together for the achievement of a single and pre-specified goal.. These employees of a company have been distributed into different departments, which mean that the real productivity of an entity lies in their departments (Damien McLoughlin, 2010). Usually, there ...

[Author’s Name] [Institution’s Name]

Introduction

There is always a positive relationship among organization and productivity, in fact whatever an organization does is merely to enhance their productivity (Damien McLoughlin, 2010). Different authors has had come with different ideas regarding organizations and their objectives and most of the authors stated that, organization is basically a place, wherein people belongs to different demographics work together for the achievement of a single and pre-specified goal. These people would be regarded as the employees of a company. These employees of a company have been distributed into different departments, which mean that the real productivity of an ...

Adventure Brewing Company is one of the corporations that are in the competitive beer market. The corporation is located in Fredericksburg, Virginia and it has played a key role in providing jobs for the people (Adventure brewing Co., 2013). Despite many competitive brands of beer in the market, Adventure Brewing Company markets itself in the country through good use of media services for advertisement. In addition, Adventure Brewing Company is known for hosting beer festivals and contributing in other event to enrich the culture of the state as a whole (Love on Tap, 2013). Through these activities, the company gains both ...

[INSERT YOUR NAME] [INSERT YOUR INSTITUTION’S NAME]

Financial Management

The US Securities and Exchange Commission (SEC) defines a high net-worth investor as one who has invested over $750,000 in the stock market. A majority of these investors are institutional. A small investor is, therefore, an investor whose investment is below $750,000. Such investors typically trade as individuals and on their own behalf. Owing to the difference in resources, investment trends of small investors and institutional investors differ greatly. This is caused mainly by differences in access to information and bargaining power. Small investors face several challenges when ...

Coming Home Funeral services seems to be a company which has potential for growth and this is demonstrated in its financial figures. However this growth appears to be very conservative according to peer reviewed estimates which show that this is more likely to be 1.5 per cent than what the company’s directors are projecting. The revenue was flat for three years at 111,000 the rising moderately to 114,000 after the third year and to 117,446 after the sixth year. This shows that the sales figures are showing slow growth and this could be due to a number ...

In early2003, Boeing aeronautical company announced its plan to build a ‘Super efficient’ airframe known as the 7e7, which was subsequently dubbed the ‘Dreamliner’. Michael Blair the team leader of the project announced in June 2003 that the 7e7 Boeing project was making excellent progress though amidst an unfriendly working environment. The technological superiority of the new airplane and the fact that the project had to penetrate an already rapidly growing market were the major arguments for the approval of the project. In addition, the idea of the airframe project came shortly after news of a six-month depressed airline market which ...

Question 1

The risk free rate from Bloomberg.com is 2.625%

Question 2

Beta = 1.64 Current annual dividend = $0.8 3-year dividend growth rate = 8.2% Industry P/E = 15.65 Earnings per share = $4.87

Question 3

Ks = KRF + (Risk Premium) Bs

Where KRF is the risk free rate as determined by the central bank,

Risk premium is the difference between market risk and the risk free rate. Bs is the security beta and is a volatility measure of the degree to which the securities returns moves in the same direction as market risk.

The required rate of return is then calculated as;

Ks =2.625 + (9) 1.64= 17.39%

Question 4

Current stock price using Constant Growth Model (D0) = $0.8, G=8.2%, (D1) = $0.8*1.082 = $0.8656 Po= D1/ ( ...

Introduction

Value of a risk (VaR) is widely defined as probabilistic measure of market risk. Financial analysts use VaR to predict the future value of the market portfolio. Previous scholars who invented this idea of VaR did not use the name value of a risk. However, names like dollar at risk (DaR), income at risk (IaR), capital at risk (CaR), and earning at risk were used in place of VaR. The name ‘value at risk’ originated within JP Morgan before 1985. Historically, value of a risk was developed though two parallel line. One of them was called Portfolio theory and the other ...

Financial ratios are used to evaluate the company's financial performance in the market. This helps in identifying the key financial areas in the organization. The ratios are also used to compare the company performance with that of its competitors. This helps management in developing strategies for improving the organization financial position over that of their competitors. The intent of this paper is to analyze the financial ratios of Google and Yahoo companies, and a comparison is made with the whole industry. The analysis of the ratio between the two companies is done for a period of five years starting from the ...

Capital asset pricing model serves for decision making purposes relating to a portfolio of assets. The technique factors in the expected market rate of return, the risk free rate and the beta of the related asset. The CAPM model works on a number of assumptions. Two important assumptions of the CAPM model are that investors are rational and risk adverse and that the information flows perfectly to all investors. CAPM formula is the sum of the risk free rate and the product of risk premium and the beta. Beta is found by dividing the market covariance and risk free rates of ...

Financial management

In large organizations, ratios are usually used for benchmarking as well as for effectively analyzing the performance. Both large and small organizations are usually interested in the profitability, efficiency and the liquidity of their firms. Profitability ratios measure the rate at which organizations are successful in creating wealth. Efficiency ratios measure the capability of organizations in utilizing the company’s resources in earning profits. The liquidity ratios measure the ability of organizations in meeting the short term obligations.

Profitability ratio

The profitability ratio is usually composed of return to asset ratio, net profit margin and gross margin ratio. A small firm ...

Cost of Equity Capital

Cost of equity can defined as the opportunity cost of raising finances through equity. Equity comprises of ordinary share capital and retained earnings of a company. The rate of return expected by investors is the same as the cost of equity. Cost of equity is therefore important in valuation of shares. However, unlike debt securities, which have fixed interest, dividend paid on equity securities fluctuate over time. It is in the discretion of the management of any company discretion to determine how much dividend to pay in case they decide to pay dividend. This makes it hard to estimate the ...

There are various techniques used to evaluate viability of investments and in comparing different investments. These techniques include net present value, payback period, accounting rate of return and internal rate of return . Net present value is preferred when evaluating projects because in takes into consideration time value of money unlike Payback period and accounting rate of return. Although internal rate of return considers time value of money it is confusing to compute and conceptualize . Net Present value is computed by discounting annual cash flows at a given discounting rate. Annual cash flows are determined by subtracting annual cash outflows ...

Abstract

The principles of financial management are very important as they help in ensuring the smooth running of all the financial activities of a firm. Several financial management principles are in existent and they cover different areas of management. There are about ten different principles of financial management. However, in this paper we are going to lay more emphasis on three of the principles among them; cash is king, not all risks are equal and efficient markets. This research is going to consider the Zales Jewelry Company and how the company implements the use of different financial management principles. We are ...