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# Beta and Return Estimation

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* INTRODUCTION OF HSBC HOLDINGS PLC

HSBC Holdings Plc. is a global banking and financial services company headquartered in Canary Warf, London, United Kingdom. It was founded by the Hong Kong and Shanghai Banking Corporation in 1911. It was originally created to pursue and establish exchanges between Europe and Asia using the Midland Bank as a connecting link. The first branch was opened in 1865 in Hong Kong and Shanghai.
Over the last century HSBC expanded from Asia to 4 other continents including Africa, Europe, North and South America. The financial statements show that HSBC has successfully established services in more than 87 countries, with more than 7,500 offices and more than 100 million customers. The annual statements indicated that its assets are more $2.418 trillion. HSBC is listed in the London Stock Exchange market. It is included in the FTSE 100 company list earning deservedly the 3rd place in the table list with the 10 largest companies measured by market capitalization with equity equal to £118 billion, coming after BHP Billiton with £148 billion and Royal Dutch Shell with £135 billion. FTSE 100 is arguable the most useful tool for the estimation of the market returns, which in later use can help to valuate market prices for a specific UK company listed in LSE, estimating future prices and forecasting possible threats in the present value of investments. * BETA AND CAPM MODEL ANALYSIS * Beta The first thing that has to be done, in order to estimate the rate of return of an asset is to calculate the beta, which is a measure of the investment’s portfolio risk. The beta of the stock will help us understand the relation between the company’s and the market’s return as a whole. In order to do so, we used the following procedure. 1. Historic prices and data for this calculation were downloaded by finance.yahoo.com. A 7-year time range was used for the estimation of beta and expected return for the market and the company. 2. The company’s and the market’s historical prices were expressed as a percentage using the following equation: Return = Current price-Previous priceCurrent price 3. After expressing the return in percentages, the Variance and the Covariance between the company’s returns and the market’s returns were calculated in order to demonstrate the co-change between the two variables. The calculations were derived from the following equations: VARHSBC= E(X²) – E(X)² VARMARKET= E(Y²) – E(Y)² COVHSBC, MARKET= E((X-E(X))x(Y-E(Y)) 4. Annualize the calculated data. This is done by multiplying the monthly data with 12, in order to find the expected returns that the company will have after one whole year rather than each month. This is done because we want to know the return that the company will generate after a financial year. 5. Last we calculate the beta using the following equation Beta = COVHSBC, MARKETVARMARKET The stock price of the company does not change independently. It is affected by the market price and other external factors, which contribute to the increase or the decrease of the present stock value of the company. The beta for HSBC Holdings Plc. is 0,8630. This positive beta gives us an example of how the company stock price will follow the changes of the market. Since the beta is less than 1, the first thing that can be said is that sensitivity of the security of the company is less volatile than the market. Specifically in this case, the company’s price is 13.6% less volatile to change when the market changes. This sensitivity shows that the changes incurred in the market won’t affect as much the company, even though they have a correlation of 53% - they both move in the same direction. For example, if the market price rises by 100%, the company’s price will only rise by 86,30%. * Risk-free rate The second thing we have to do is estimate the risk-free rate. This is actually a price return rate on an investment with no risk of financial loss for the investor during the specific time period. To estimate the risk free rate we calculated the average risk-free rates given by the 2-year UK government bonds showed as yield percentages, downloaded from the www.ft.com website. In this particular case the average risk free rate that will be used in the CAPM estimation is 0.516%. The average estimation included the 1-month, 3-month, 6-month, 1-year and 2-year bonds. * Expected Return of the market The time range used to calculate the expected market return (FTSE 100) is 7 years (1st November 2004 to 1st November 2011). The calculation of the average expected return of the market, when annualized, gives a rate of 2,9%. * Market Risk Premium According to Brealey, Myers and Allen (2011) ‘when you want to expand your wealth by investing, you don’t take risks for fun. Therefore, investors want to obtain higher returns from the market portfolio’. This is higher return that investors want to obtain is equal to Rm-Rf, where Rf is the risk-free rate and Rm the expected return of the market. The market risk premium here is 2,98%-0,516%=2,466%. * CAPM model Since we gathered all the necessary data we can now calculate the CAPM, using the formula dictated by the model: E(R)= Rf + b*(Rm –Rf) Where E(R) is the expected return of the company, b is the beta of the security calculated above, Rf is the risk free rate, and Rm-Rf is the market risk premium. Adjusting all the data to the previous formula we get an expected return for the HSBC equals to E(R)=0,026446929=2,64% This figure shows us that when the market prices change, then we expect a change of 2.64% of the company’s stock price. The previous calculations were shown to the following tables. * EXCEL TABLE – RETURNS | HSBC | FTSE 100 | DATE | ADJ CLOSE | RETURN | ADJ CLOSE | RETURN | Nov 1, 2011 | 522,44 | | 5362,9 | | Oct 3, 2011 | 545,13 | -4,16% | 5075,5 | 5,66% | Sep 1, 2011 | 487,6 | 11,80% | 5128,5 | -1,03% | Aug 1, 2011 | 523,46 | -6,85% | 5394,5 | -4,93% | Jul 1, 2011 | 573,87 | -8,78% | 5815,2 | -7,23% | Jun 1, 2011 | 596,94 | -3,86% | 5945,7 | -2,19% | May 3, 2011 | 613,96 | -2,77% | 5990 | -0,74% | Apr 1, 2011 | 623,75 | -1,57% | 6069,3 | -1,31% | Mar 1, 2011 | 610,04 | 2,25% | 5908,8 | 2,72% | Feb 1, 2011 | 632,37 | -3,53% | 5994 | -1,42% | Jan 4, 2011 | 635,7 | -0,52% | 5862,9 | 2,24% | Dec 1, 2010 | 608,14 | 4,53% | 5899,9 | -0,63% | Nov 1, 2010 | 605,53 | 0,43% | 5528,3 | 6,72% | Oct 1, 2010 | 598,99 | 1,09% | 5675,2 | -2,59% | Sep 1, 2010 | 595,2 | 0,64% | 5548,6 | 2,28% | Aug 2, 2010 | 594 | 0,20% | 5225,2 | 6,19% | Jul 1, 2010 | 588,98 | 0,85% | 5258 | -0,62% | Jun 1, 2010 | 560,9 | 5,01% | 4916,9 | 6,94% | May 4, 2010 | 572,32 | -2,00% | 5188,4 | -5,23% | Apr 1, 2010 | 601,55 | -4,86% | 5553,3 | -6,57% | Mar 1, 2010 | 601,55 | 0,00% | 5679,6 | -2,22% | Feb 1, 2010 | 638,54 | -5,79% | 5354,5 | 6,07% | Jan 4, 2010 | 601 | 6,25% | 5188,5 | 3,20% | Dec 1, 2009 | 628,96 | -4,45% | 5412,9 | -4,15% | Nov 2, 2009 | 627,36 | 0,26% | 5190,7 | 4,28% | Oct 1, 2009 | 597,52 | 4,99% | 5044,5 | 2,90% | Sep 1, 2009 | 628,55 | -4,94% | 5133,9 | -1,74% | Aug 3, 2009 | 590,01 | 6,53% | 4908,9 | 4,58% | Jul 1, 2009 | 525,28 | 12,32% | 4608,4 | 6,52% | Jun 1, 2009 | 435,75 | 20,55% | 4249,2 | 8,45% | May 1, 2009 | 482,57 | -9,70% | 4417,9 | -3,82% | Apr 1, 2009 | 410,87 | 17,45% | 4243,7 | 4,10% | Mar 2, 2009 | 337,76 | 21,65% | 3926,1 | 8,09% | Feb 2, 2009 | 410,93 | -17,81% | 3830,1 | 2,51% | Jan 2, 2009 | 454,43 | -9,57% | 4149,6 | -7,70% | Dec 1, 2008 | 553,77 | -17,94% | 4434,2 | -6,42% | Nov 3, 2008 | 598,1 | -7,41% | 4288 | 3,41% | Oct 1, 2008 | 621,17 | -3,71% | 4377,3 | -2,04% | Sep 1, 2008 | 734,48 | -15,43% | 4902,5 | -10,71% | Aug 1, 2008 | 705,54 | 4,10% | 5636,6 | -13,02% | Jul 1, 2008 | 668,94 | 5,47% | 5411,9 | 4,15% | Jun 2, 2008 | 618,51 | 8,15% | 5625,9 | -3,80% | May 1, 2008 | 679,9 | -9,03% | 6053,5 | -7,06% | Apr 1, 2008 | 686,82 | -1,01% | 6087,3 | -0,56% | Mar 3, 2008 | 648,17 | 5,96% | 5702,1 | 6,76% | Feb 1, 2008 | 569,03 | 13,91% | 5884,3 | -3,10% | Jan 2, 2008 | 558,25 | 1,93% | 5879,8 | 0,08% | Dec 3, 2007 | 625,48 | -10,75% | 6456,9 | -8,94% | Nov 1, 2007 | 616,57 | 1,45% | 6432,5 | 0,38% | Oct 1, 2007 | 692,06 | -10,91% | 6721,6 | -4,30% | Sep 3, 2007 | 658,22 | 5,14% | 6466,8 | 3,94% | Aug 1, 2007 | 652,77 | 0,83% | 6303,3 | 2,59% | Jul 2, 2007 | 652,77 | 0,00% | 6360,1 | -0,89% | Jun 4, 2007 | 653,29 | -0,08% | 6607,9 | -3,75% | May 1, 2007 | 666,58 | -1,99% | 6621,4 | -0,20% | Apr 2, 2007 | 650,68 | 2,44% | 6449,2 | 2,67% | Mar 1, 2007 | 623,69 | 4,33% | 6308 | 2,24% | Feb 1, 2007 | 599,69 | 4,00% | 6171,5 | 2,21% | Jan 2, 2007 | 622,58 | -3,68% | 6203,1 | -0,51% | Dec 1, 2006 | 626,61 | -0,64% | 6220,8 | -0,28% | Nov 1, 2006 | 631,33 | -0,75% | 6048,8 | 2,84% | Oct 2, 2006 | 658,86 | -4,18% | 6129,2 | -1,31% | Sep 1, 2006 | 645,93 | 2,00% | 5960,8 | 2,83% | Aug 1, 2006 | 631,68 | 2,26% | 5906,1 | 0,93% | Jul 3, 2006 | 633,59 | -0,30% | 5928,3 | -0,37% | Jun 1, 2006 | 620,87 | 2,05% | 5833,4 | 1,63% | May 1, 2006 | 606,51 | 2,37% | 5723,8 | 1,91% | Apr 3, 2006 | 608,63 | -0,35% | 6023,1 | -4,97% | Mar 1, 2006 | 619,87 | -1,81% | 5964,6 | 0,98% | Feb 1, 2006 | 606,02 | 2,29% | 5791,5 | 2,99% | Jan 2, 2006 | 581,13 | 4,28% | 5760,3 | 0,54% | Dec 1, 2005 | 580,51 | 0,11% | 5618,8 | 2,52% | Nov 1, 2005 | 576,16 | 0,75% | 5423,2 | 3,61% | Oct 3, 2005 | 548,21 | 5,10% | 5317,3 | 1,99% | Sep 1, 2005 | 565,8 | -3,11% | 5477,7 | -2,93% | Aug 1, 2005 | 550,99 | 2,69% | 5296,9 | 3,41% | Jul 1, 2005 | 564,99 | -2,48% | 5282,3 | 0,28% | Jun 1, 2005 | 544,41 | 3,78% | 5113,2 | 3,31% | May 2, 2005 | 530,95 | 2,54% | 4964 | 3,01% | Apr 1, 2005 | 502,82 | 5,59% | 4801,7 | 3,38% | Mar 1, 2005 | 503,72 | -0,18% | 4894,4 | -1,89% | Feb 1, 2005 | 505,9 | -0,43% | 4968,5 | -1,49% | Jan 3, 2005 | 512,02 | -1,20% | 4852,3 | 2,39% | Dec 1, 2004 | 512,31 | -0,06% | 4814,3 | 0,79% | Nov 1, 2004 | 519,31 | -1,35% | 4703,2 | 2,36% | * EXCEL TABLE – EXPECTED RETURNS | | | | | | | | | | Monthly | Annualized | EXPECTED RETURN ON FTSE 100 | 0,25% | 2,98% | RISK FREE | 0,516% | 0,516% | MARKET RISK PREMIUM | -0,267% | 2,466% | | VARIANCE OF HSBC | 0,0048 | 0,0575 | VARIANCE OF FTSE 100 | 0,0018 | 0,0220 | | COVARIANCE OF MARKET-STOCK | 0,0016 | 0,0190 | | STANDARD DEVIATION OF HSBC | 0,0692 | 0,8307 | STANDARD DEVIATION OF FTSE | 0,0428 | 0,5138 | | CORRELATION OF COEFFICIENCY | 0,5339 | 0,0544 | | BETA | 0,8631 | 0,8631 | | EXPECTED RETURN OF HSBC | 0,29% | 2,64% | * Advantages and disadvantages about the data * Time range factor In order to complete this assignment and to estimate the beta and the expected return, we had to obtain data. The main data source for this research project is performance data from the year 2004 to the year 2011. Firstly, we obtained the monthly historical prices with a 7-year-time range for the share of HSBC Holdings Plc. – 1st of November 2004 to 1st of November 2011. Monthly stock returns tend to be more stable for the long-term period, rather that the short-term. Since the market is usually stable, stock prices are not characterized as unpredictable and variable. Inevitably though, some months will experience different variations in the prices; this is because of the difference in the company’s performance and the events happening at the time, which result in the increase or decrease of the stock value. Since the data are stable enough for the calculations it is difficult for the company to manipulate the stock price, contradicting the market price. Accordingly, we used a big time range, as in 7 years’ time, to have a big variety of data. This will help us have a bigger image of the company’s performance in order to have a better forecast of the future value of stock prices. We followed the different periods and variations of the market and it was still concluded that the data were sufficient enough compared to a smaller time range, making the model as stable as possible. Given the stability of the returns of the market and the stock price, the beta estimation is as stable as possible given these historical data. * Adjusted Closing prices in expected returns Adjusted closing prices give a more accurate picture of the company’s performance, since they exclude any dividends or splits from the simple market price, making the returns more suitable for the estimation of beta. * Limitations of Beta According to Mark McCracken ‘Beta is the overall risk in investing in large markets’. Even though it’s mostly stable according to the historic price changes, has many limitations along with the benefits it provides. For starters, the main limitation of the beta and subsequently of the expected market and company return is that it is based purely on historical prices, using historical returns and values. It is financially acknowledged that past values only by themselves cannot help on forecasting the fluctuation of the market for future events is unknown which makes the calculated figure even more unreliable. Thus, since this is the methodology used for the current research project, there is nothing to do but accept that the past actions will reflect eventually the future stock prices. Secondly, another limitation for the beta calculation is the access on data available. Not all the data that are published on the financial statements are valid or true and there is no way to certify their validity. Government records may have restricted access or they can even be classified Thirdly, their validity cannot be certified; sometimes data can be biased or falsified. Moreover archival data have usually been collected for purposes other than research. There can be selective deposit and selected survival – what enters may be preselected or in crime records many crimes go unreported. Last but not least, another limitation is the alternative explanations. The stock price changes cannot be fully explained. There are always unmeasured third variables. For example, as shown in the returns table, there was a severe financial decline which resulted in falling of the UK financial market, particularly during 2005 and the whole year 2009. There was a huge recession happening in the market, resulting in price drops of the HSBC stock price approximately 30% from 2004 and 2008 accordingly. * Validity of the beta To validate the beta in order to see how accurate it is we have to calculate the R². R² shows us the coefficient of correlation between two interval variables; here the standard deviation of the market and the standard deviation of HSBC. According to M. Frenz, K. Nielsen and G. Walters (2011) ‘correlation is a parametric technique which gives a measure of association between two variables only suitable for quantitative interval data’. Consequently since the coefficient of correlation=5,44%, there are three things that can be identified 1. The linearity of the correlation 2. The positive direction of the relationship 3. The strength of the relationship, which is the distance of the observations from the line. Since the figure is above is above 5% so acceptable, it makes the beta calculation a big part of the variance, making the calculated figure significant and is further accepted by later estimation since it’s not affected by the systematic risk. * Risk free rate limitation As mentioned before, to estimate the expected return of the company we plugged the risk-free rate into the formula. In reality though there is no risk-free rate since there are no investments that have zero risk. Also the risk free rate is very subjective. Different investors have different perspective of risk and return. This fact makes the model even more unstable and the results that we will deliver will most likely not be accepted by another individual who is willing to invest in our security. But the average was used because it was shown in statistics than even in the recession times the risk-free rate was paid out to the investors * Advantages and disadvantages of the methodology used The CAPM model is on the one hand mostly used when someone wants to avoid risk by abhorring it. On the other hand though, when investors do take risks, they expect to be awarded more than the average risk-free percentage of the investment. The validity of the CAPM model is usually challenged. In order for us to establish our theory on the calculation of the data, we have to assume some hypothesis for this particular model. Even though these assumptions make the CAPM model reliable, it is sometimes described as unrealistic and biased. According to Markowitz’s mean-variance model, ‘the CAPM inherits all the shortcomings of the market in addition to its own assumptions’ (1997). As far as investors are concerned, to make a correct and profitable investment, investors have to be rational and abhor the risk – risk averse. In this way they aim for the maximum expected utility of their end of holding period wealth , assuming though that they all operate in the same time horizon. Secondly, all investors should have equal access to information simultaneously. This should be costless. This means that they will have homogenous expectations about asset returns and use the same input list, agreeing that this is the only method for market assessment. When the market changes and there are fluctuations they will interpret the changes in the same manner. Thirdly, investors as a whole are price takers. The total endowment of all investors is smaller than the individual endowment; something that can never change or the market will break. If they change and become price makers then this would be a market anomaly. As for the market, it should be a perfect capital market; it should be very competitive and efficient. Any trade occurred should exclude short-selling restrictions since it’s allowed and transaction costs since the trades are free-of-charge. Furthermore, taxes and inflation that affect the market should be excluded as well since they act as external factor. This will make the rates as stable and as less friction as possible. The borrowing and the lending rate should be the same, helping the investors lend or borrow under the risk-free rate of interest unlimited amounts (Fischer Black, 1972). In addition, market portfolio exists, is measurable and follows the MVE frontier. This portfolio will then be chosen by the investors as their optimal one. This explains why the assets have almost perfect liquidity making them divisible. They follow the normal curve and the normal distribution, which generally explains why no individual can affect the price of a security with a diversification across a range of investments with a fixed asset quantity. At last, since the CAPM model uses the past returns and operates with them, it simultaneously assumes that the standard deviation of the returns between the market and the company is the perfect proxy to forecast the future returns, taking into account a specific security. Using the CAPM model can have advantages over the other methods for the calculation of the expected return. Firstly, due to usual research and testing, it provides a better relationship between the systematic risk and the expected return since it takes into account the company’s systematic risk and the market return as a whole, providing more accurate information about the cost of equity compared to dividend growth model. Secondly, investors have diversified portfolios. This makes the CAPM model essential because it creates the reality that results are depended on the systematic risk, eliminating at the same time the unsystematic risk and the external factors it is biased on. Disadvantages of the CAPM model are also noted in this methodology. Firstly, even though that it is the most commonly used approach to determine whether an investment will have a good expected return either for the individuals or the investors as a whole, it has not been yet proved that this model is sufficient and accurate enough for the market. Through the years there were many argues about the validity of this model but no one could really refute or appraise this model without any counterpoint In addition, the variables used are “randomly” assigned. Values used as risk-free rate, return of the market and risk-premium are chosen for a specific time period which makes them vulnerable to errors. What is not taken into account is that they are not fixed, they can change daily or even hourly depending on the financial events happening at the time, so finding the correct value is really difficult; subjective valuation. For example, government bond yields change in real time basis, which makes the model easily outdated. Using the CAPM model in the short term period can deliver negative stock returns not only for the market but also for the company because falling share prices outweighs the dividend yields (Watson D and Head A, 2007). Therefore, should be mostly used with a big time-range in order to give us better estimations and forecasts. These results make betas more unstable. Since betas are calculated based on historical prices and follow a normal distribution of returns, they are consistent to statistical and estimation errors since it’s not always used in real life economy. If for example if yearly data were obtained instead of monthly, then the results would probably be different from the ones we got now. For example in this assignment, if we were to take data for the last 5 instead of 7 years, the beta would be 0,8809 but the expected return of the market would be -0,82%, which is a totally different figure. Another problem with the application of CAPM is that it consists of inadequate information of the market. Financial description should contain realistic data that can comply with almost every other pricing model, helping researchers making accurate conclusions. This makes it even harder to estimate a correct discount rate, like proxy betas which normally include a variety of businesses instead of only one. At last, there is a financial difficult on estimating the theoretical approach for deciding the appropriate capital budget for real assets. Researchers tried to estimate new formulas which don’t include variables dependent on time, but dependent on company’s performance and market price. They make the CAPM application more severe due to different judgments on the correct capital equity. CAPM is the model that it’s mostly attacked. Through times there were many refutations about the validity of the calculations or even the methodology used. Even though CAPM is so severely criticized, it stands well to criticism and remains the most accurate expected return model; rather than the APT (Arbitrage Pricing Theory) which is the second most used model for financial decisions. Even though both these models are quite similar the latter is mostly described more than an extension to the first, rather than a new independent model. Although CAPM model is not perfect, it is widely used by investors who want to calculate the cost capital of their investment, which eventually ‘idealized it and made it the cornerstone of future forecasts for investments. It has also evolved in order to be more applicable and compete with complexities in the real world’ (Megginson W L, 1996) * Other ways to calculate the expected returns of a company is to use the regression model. The distance between the points from the x-axis and the y-axis shows the correlation between the two variables. The linear relationship between HSBC and FTSE 100 shows the co-change when the prices change; we used the slope command in order to calculate the beta. The result is the same as before and it is shown as : * CONCLUSION Investments have become a daily routine for almost everyone. The most secure investment is the bank deposit which is risk free for individuals. The market investment though, can deliver higher return percentages and consequently more profit. The conclusions drawn for HSBC Holdings Plc. were mostly positive. According to our calculations and given the detailed analysis, the expected returns for future investments were positive as they will result in bigger growth and expansion of the company. They will result to more profits since they are in-line with the market financial growth. They will provide more profits for a price increase and they will have a smaller loss in case of a price decrease. Given the detailed analysis though of the CAPM model, the results remain to some extent questionable because CAPM is only a simple theory with a simple result. We can surely draw some conclusions about what is going to happen in the future but we should always keep in mind that it’s based in historic data which can change daily; furthermore during the 7-year-time that we took, we had serious recession times during 2004 and 2009 resulting in great loss in capital for investors and big decrease in companies’ performance, concluding in the decrease of the share price. The historical prices should not be accepted 100% as the actual factor for future predictions. This is because of the recession and past events like the 09/11, during which there was 5% inflation in UK Banks, where unemployment levels along with the cut back in investing and spending were increased. In addition, the average stock return creates a distortion caused by these declining factors, so analyzing the risk based on standard deviation can cause as well misleading conclusions. To eliminate those misleading conclusions CAPM model should be used alongside with other pricing models in order to conduct a more thorough analysis for better understanding and to conclude to the best possible answers about whether an investment will be profitable or not. The contribution of the CAPM model helped us evaluate the diversified portfolio. The diversified assets lower the expected returns, but raise the prices. The risk taken is not always rewarded, that’s why diversified portfolios should despite the empirical difficulties be allocated to investments with higher returns in proportion to their systematic risk. ‘But the spirit of CAPM is correct. It provides a usable measure of risk that helps investors determine what return they deserve for putting their money at risk’ (Sharpe 1964, 1998, Cheng 1995, Grundy and Malkiel 1996). Until a new method is developed that will eliminate the anomalies of CAPM, CAPM is the most accurate method we can use to test the profitability of investments. * APPENDIX * The following historical data were pulled of finance.yahoo.com. It was a necessity to obtain them, in order to calculate the expected return of HSBC in comparison to the market. There is a 7-year-time range for the previous calculations. * HISTORICAL PRICES ON HSBC Date | Open | High | Low | Close | Avg Vol | Adj Close* | Nov 1, 2011 | 538.00 | 538.00 | 521.00 | 532.40 | 63,353,800 | 522,44 | Oct 3, 2011 | 485.15 | 575.30 | 466.45 | 555.53 | 26,831,300 | 545,13 | Sep 1, 2011 | 540.00 | 542.80 | 484.00 | 496.90 | 30,147,600 | 487,6 | Aug 1, 2011 | 606.20 | 624.90 | 495.00 | 536.60 | 33,914,700 | 523,46 | Jul 1, 2011 | 619.90 | 631.20 | 588.70 | 594.50 | 22,085,500 | 573,87 | Jun 1, 2011 | 636.00 | 637.60 | 597.60 | 618.40 | 26,768,900 | 596,94 | May 3, 2011 | 658.80 | 667.72 | 621.90 | 635.30 | 30,002,400 | 613,96 | Apr 1, 2011 | 645.30 | 674.30 | 619.31 | 655.40 | 26,214,000 | 623,75 | Mar 1, 2011 | 675.00 | 678.00 | 565.20 | 641.00 | 48,927,800 | 610,04 | Feb 1, 2011 | 683.30 | 739.63 | 667.50 | 677.04 | 251,778,000 | 632,37 | Jan 4, 2011 | 665.80 | 719.10 | 663.10 | 680.60 | 28,555,400 | 635,7 | Dec 1, 2010 | 655.00 | 676.30 | 650.60 | 651.10 | 20,629,300 | 608,14 | Nov 1, 2010 | 653.10 | 714.50 | 642.10 | 648.30 | 31,632,600 | 605,53 | Oct 1, 2010 | 651.90 | 677.60 | 646.80 | 649.10 | 24,889,700 | 598,99 | Sep 1, 2010 | 642.40 | 683.40 | 636.40 | 645.00 | 28,729,600 | 595,2 | Aug 2, 2010 | 656.30 | 684.00 | 623.60 | 643.70 | 28,028,500 | 594 | Jul 1, 2010 | 608.00 | 677.80 | 595.20 | 646.00 | 29,758,900 | 588,98 | Jun 1, 2010 | 622.20 | 662.80 | 612.40 | 615.20 | 33,484,600 | 560,9 | May 4, 2010 | 669.50 | 684.20 | 610.80 | 627.80 | 52,632,900 | 572,32 | Apr 1, 2010 | 670.60 | 713.50 | 655.20 | 668.00 | 39,204,000 | 601,55 | Mar 1, 2010 | 735.00 | 736.60 | 664.80 | 668.00 | 45,659,000 | 601,55 | Feb 1, 2010 | 675.00 | 728.50 | 638.30 | 719.60 | 41,767,900 | 638,54 | Jan 4, 2010 | 713.30 | 747.20 | 653.30 | 677.30 | 36,085,400 | 601 | Dec 1, 2009 | 715.20 | 734.90 | 677.60 | 708.80 | 26,914,100 | 628,96 | Nov 2, 2009 | 677.10 | 766.80 | 660.40 | 707.00 | 41,169,700 | 627,36 | Oct 1, 2009 | 717.20 | 726.90 | 669.90 | 680.65 | 39,429,500 | 597,52 | Sep 1, 2009 | 661.90 | 733.80 | 637.00 | 716.00 | 37,989,800 | 628,55 | Aug 3, 2009 | 597.00 | 677.70 | 593.60 | 672.10 | 18,258,400 | 590,01 | Jul 1, 2009 | 500.75 | 614.85 | 487.00 | 605.75 | 13,587,100 | 525,28 | Jun 1, 2009 | 561.50 | 569.50 | 498.25 | 502.50 | 15,720,900 | 435,75 | May 1, 2009 | 477.00 | 584.50 | 470.00 | 556.50 | 11,263,700 | 482,57 | Apr 1, 2009 | 390.25 | 501.25 | 385.75 | 480.50 | 54,417,400 | 410,87 | Mar 2, 2009 | 459.00 | 499.25 | 310.25 | 395.00 | 121,761,100 | 337,76 | Feb 2, 2009 | 531.00 | 573.00 | 462.50 | 491.25 | 45,411,500 | 410,93 | Jan 2, 2009 | 675.00 | 685.00 | 460.00 | 543.25 | 59,091,800 | 454,43 | Dec 1, 2008 | 717.50 | 762.75 | 594.25 | 662.00 | 39,483,300 | 553,77 | Nov 3, 2008 | 739.00 | 790.00 | 605.25 | 715.00 | 47,678,200 | 598,1 | Oct 1, 2008 | 908.00 | 930.00 | 617.75 | 762.00 | 47,033,500 | 621,17 | Sep 1, 2008 | 859.75 | 938.00 | 785.25 | 901.00 | 58,481,100 | 734,48 | Aug 1, 2008 | 830.00 | 873.50 | 802.75 | 865.50 | 42,768,000 | 705,54 | Jul 1, 2008 | 770.50 | 849.75 | 697.00 | 839.00 | 61,197,200 | 668,94 | Jun 2, 2008 | 855.75 | 868.25 | 770.00 | 775.75 | 45,838,900 | 618,51 | May 1, 2008 | 877.00 | 897.50 | 843.75 | 852.50 | 39,188,500 | 679,9 | Apr 1, 2008 | 826.00 | 887.00 | 825.00 | 879.50 | 42,903,400 | 686,82 | Mar 3, 2008 | 767.00 | 841.00 | 748.50 | 830.00 | 65,239,300 | 648,17 | Feb 1, 2008 | 760.00 | 809.50 | 710.00 | 766.00 | 47,215,300 | 569,03 | Jan 2, 2008 | 844.00 | 850.50 | 676.00 | 751.50 | 62,869,400 | 558,25 | Dec 3, 2007 | 825.00 | 863.00 | 803.00 | 842.00 | 40,936,200 | 625,48 | Nov 1, 2007 | 945.50 | 945.50 | 783.50 | 830.00 | 61,014,200 | 616,57 | Oct 1, 2007 | 899.00 | 972.00 | 895.50 | 951.00 | 63,997,000 | 692,06 | Sep 3, 2007 | 893.50 | 922.50 | 867.50 | 904.50 | 57,536,600 | 658,22 | Aug 1, 2007 | 899.00 | 919.00 | 858.50 | 897.00 | 64,171,000 | 652,77 | Jul 2, 2007 | 912.50 | 923.00 | 870.00 | 914.00 | 63,541,800 | 652,77 | Jun 4, 2007 | 931.50 | 942.50 | 906.00 | 915.00 | 56,071,500 | 653,29 | May 1, 2007 | 925.00 | 958.00 | 917.50 | 934.00 | 53,661,000 | 666,58 | Apr 2, 2007 | 886.50 | 935.00 | 882.00 | 928.00 | 68,501,000 | 650,68 | Mar 1, 2007 | 891.00 | 915.00 | 872.00 | 889.50 | 81,231,400 | 623,69 | Feb 1, 2007 | 933.00 | 939.50 | 886.00 | 891.00 | 59,292,900 | 599,69 | Jan 2, 2007 | 933.50 | 953.00 | 909.00 | 925.00 | 53,228,300 | 622,58 | Dec 1, 2006 | 940.50 | 946.00 | 909.50 | 931.00 | 54,049,800 | 626,61 | Nov 1, 2006 | 1,000.00 | 1,028.50 | 934.50 | 938.00 | 54,334,300 | 631,33 | Oct 2, 2006 | 975.50 | 1,021.00 | 960.00 | 994.00 | 39,242,600 | 658,86 | Sep 1, 2006 | 957.00 | 981.50 | 946.50 | 974.50 | 34,904,200 | 645,93 | Aug 1, 2006 | 970.00 | 971.50 | 938.00 | 953.00 | 30,659,800 | 631,68 | Jul 3, 2006 | 954.00 | 986.00 | 934.50 | 971.00 | 37,931,700 | 633,59 | Jun 1, 2006 | 929.50 | 961.50 | 913.50 | 951.50 | 41,674,100 | 620,87 | May 31, 2006 | 910.00 | 934.00 | 905.50 | 929.50 | 118,190,000 | 606,51 | May 1, 2006 | 947.50 | 992.00 | 905.50 | 929.50 | 846,2 | 606,51 | Apr 3, 2006 | 977.00 | 982.00 | 940.50 | 947.50 | 34,340,900 | 608,63 | Mar 1, 2006 | 978.00 | 998.00 | 954.00 | 965.00 | 48,754,000 | 619,87 | Feb 1, 2006 | 931.50 | 994.00 | 927.50 | 974.00 | 36,004,100 | 606,02 | Jan 2, 2006 | 933.00 | 970.50 | 921.00 | 934.00 | 45,154,600 | 581,13 | Dec 1, 2005 | 930.50 | 939.50 | 907.00 | 933.00 | 23,259,000 | 580,51 | Nov 1, 2005 | 888.50 | 954.00 | 887.50 | 926.00 | 34,812,200 | 576,16 | Oct 3, 2005 | 921.00 | 926.00 | 867.50 | 888.50 | 31,847,300 | 548,21 | Sep 1, 2005 | 895.00 | 926.00 | 879.00 | 917.00 | 34,957,200 | 565,8 | Aug 1, 2005 | 926.00 | 936.00 | 885.00 | 893.00 | 26,864,100 | 550,99 | Jul 1, 2005 | 893.00 | 941.50 | 880.00 | 923.00 | 35,832,000 | 564,99 | Jun 1, 2005 | 870.50 | 898.00 | 867.50 | 890.00 | 20,791,800 | 544,41 | May 2, 2005 | 835.50 | 875.00 | 835.50 | 868.00 | 17,504,900 | 530,95 | Apr 1, 2005 | 837.00 | 848.00 | 821.50 | 835.50 | 20,113,500 | 502,82 | Mar 1, 2005 | 868.00 | 869.50 | 829.50 | 837.00 | 21,600,700 | 503,72 | Feb 1, 2005 | 875.00 | 913.50 | 863.50 | 868.00 | 24,631,200 | 505,9 | Jan 3, 2005 | 879.00 | 900.00 | 860.50 | 878.50 | 18,243,600 | 512,02 | Dec 1, 2004 | 890.00 | 898.00 | 859.50 | 879.00 | 15,775,100 | 512,31 | Nov 1, 2004 | 881.50 | 953.50 | 881.00 | 891.00 | 23,506,700 | 519,31 | * HISTORICAL PRICES FOR FTSE 100 Date | Open | High | Low | Close | Avg Vol | Adj Close* | Nov 1, 2011 | 5,544.20 | 5,616.00 | 5,338.40 | 5,362.90 | 1,014,177,400 | 5,362.90 | Oct 3, 2011 | 5,128.50 | 5,747.30 | 4,868.60 | 5,544.20 | 907,649,300 | 5,544.20 | Sep 1, 2011 | 5,394.50 | 5,449.70 | 4,928.10 | 5,128.50 | 981,980,500 | 5,128.50 | Aug 1, 2011 | 5,815.20 | 5,913.50 | 4,791.00 | 5,394.50 | 1,232,405,500 | 5,394.50 | Jul 1, 2011 | 5,945.70 | 6,084.10 | 5,752.80 | 5,815.20 | 858,918,500 | 5,815.20 | Jun 1, 2011 | 5,990.00 | 5,995.20 | 5,644.40 | 5,945.70 | 921,906,300 | 5,945.70 | May 3, 2011 | 6,069.90 | 6,103.70 | 5,810.50 | 5,990.00 | 942,955,800 | 5,990.00 | Apr 1, 2011 | 5,908.80 | 6,091.80 | 5,858.30 | 6,069.90 | 760,782,900 | 6,069.90 | Mar 1, 2011 | 5,994.00 | 6,052.10 | 5,591.60 | 5,908.80 | 904,076,700 | 5,908.80 | Feb 1, 2011 | 5,862.90 | 6,105.80 | 5,861.00 | 5,994.00 | 897,500,900 | 5,994.00 | Jan 4, 2011 | 5,899.90 | 6,090.50 | 5,815.40 | 5,862.90 | 939,491,400 | 5,862.90 | Dec 1, 2010 | 5,528.30 | 6,021.50 | 5,528.30 | 5,899.90 | 667,441,600 | 5,899.90 | Nov 1, 2010 | 5,675.20 | 5,902.10 | 5,519.20 | 5,528.30 | 940,455,100 | 5,528.30 | Oct 1, 2010 | 5,548.60 | 5,794.30 | 5,547.50 | 5,675.20 | 846,543,400 | 5,675.20 | Sep 1, 2010 | 5,225.20 | 5,650.30 | 5,225.20 | 5,548.60 | 860,118,500 | 5,548.60 | Aug 2, 2010 | 5,258.00 | 5,418.60 | 5,070.90 | 5,225.20 | 922,769,100 | 5,225.20 | Jul 1, 2010 | 4,916.90 | 5,411.50 | 4,790.00 | 5,258.00 | 989,418,400 | 5,258.00 | Jun 1, 2010 | 5,188.40 | 5,331.50 | 4,898.50 | 4,916.90 | 1,167,363,700 | 4,916.90 | May 4, 2010 | 5,553.30 | 5,566.00 | 4,898.50 | 5,188.40 | 1,682,602,400 | 5,188.40 | Apr 1, 2010 | 5,679.60 | 5,833.70 | 5,533.60 | 5,553.30 | 1,082,696,100 | 5,553.30 | Mar 1, 2010 | 5,354.50 | 5,742.80 | 5,354.50 | 5,679.60 | 1,137,274,200 | 5,679.60 | Feb 1, 2010 | 5,188.50 | 5,395.50 | 5,033.00 | 5,354.50 | 1,360,249,000 | 5,354.50 | Jan 4, 2010 | 5,412.90 | 5,600.50 | 5,145.70 | 5,188.50 | 1,185,835,600 | 5,188.50 | Dec 1, 2009 | 5,190.70 | 5,445.20 | 5,175.70 | 5,412.90 | 982,503,800 | 5,412.90 | Nov 2, 2009 | 5,044.50 | 5,397.00 | 4,985.10 | 5,190.70 | 1,100,711,300 | 5,190.70 | Oct 1, 2009 | 5,133.90 | 5,299.60 | 4,955.00 | 5,044.50 | 1,175,992,900 | 5,044.50 | Sep 1, 2009 | 4,908.90 | 5,190.00 | 4,776.50 | 5,133.90 | 1,080,214,200 | 5,133.90 | Aug 3, 2009 | 4,608.40 | 4,944.20 | 4,595.60 | 4,908.90 | 1,084,924,000 | 4,908.90 | Jul 1, 2009 | 4,249.20 | 4,646.90 | 4,096.10 | 4,608.40 | 1,036,404,000 | 4,608.40 | Jun 1, 2009 | 4,417.90 | 4,517.60 | 4,213.40 | 4,249.20 | 1,212,136,600 | 4,249.20 | May 1, 2009 | 4,243.70 | 4,520.80 | 4,210.80 | 4,417.90 | 1,266,231,100 | 4,417.90 | Apr 1, 2009 | 3,926.10 | 4,293.60 | 3,838.20 | 4,243.70 | 1,331,381,800 | 4,243.70 | Mar 2, 2009 | 3,830.10 | 3,992.40 | 3,460.70 | 3,926.10 | 1,547,110,800 | 3,926.10 | Feb 2, 2009 | 4,149.60 | 4,334.00 | 3,760.70 | 3,830.10 | 1,315,004,600 | 3,830.10 | Jan 2, 2009 | 4,434.20 | 4,675.70 | 3,956.70 | 4,149.60 | 1,381,094,300 | 4,149.60 | Dec 1, 2008 | 4,288.00 | 4,456.20 | 3,973.30 | 4,434.20 | 967,711,700 | 4,434.20 | Nov 3, 2008 | 4,377.30 | 4,639.50 | 3,734.10 | 4,288.00 | 1,386,575,900 | 4,288.00 | Oct 1, 2008 | 4,902.50 | 5,052.00 | 3,665.20 | 4,377.30 | 1,788,654,400 | 4,377.30 | Sep 1, 2008 | 5,636.60 | 5,646.50 | 4,671.00 | 4,902.50 | 1,628,366,000 | 4,902.50 | Aug 1, 2008 | 5,411.90 | 5,649.10 | 5,299.70 | 5,636.60 | 1,230,898,300 | 5,636.60 | Jul 1, 2008 | 5,625.90 | 5,625.90 | 5,071.10 | 5,411.90 | 1,735,849,400 | 5,411.90 | Jun 2, 2008 | 6,053.50 | 6,074.50 | 5,470.90 | 5,625.90 | 1,542,828,100 | 5,625.90 | May 1, 2008 | 6,087.30 | 6,377.00 | 6,041.10 | 6,053.50 | 1,248,136,200 | 6,053.50 | Apr 1, 2008 | 5,702.10 | 6,134.50 | 5,670.40 | 6,087.30 | 1,201,736,300 | 6,087.30 | Mar 3, 2008 | 5,884.30 | 5,884.30 | 5,414.40 | 5,702.10 | 1,663,850,600 | 5,702.10 | Feb 1, 2008 | 5,879.80 | 6,104.50 | 5,681.50 | 5,884.30 | 1,453,034,900 | 5,884.30 | Jan 2, 2008 | 6,456.90 | 6,534.70 | 5,338.70 | 5,879.80 | 1,649,831,500 | 5,879.80 | Dec 3, 2007 | 6,432.50 | 6,610.90 | 6,251.80 | 6,456.90 | 1,043,486,400 | 6,456.90 | Nov 1, 2007 | 6,721.60 | 6,723.70 | 6,026.90 | 6,432.50 | 1,552,055,200 | 6,432.50 | Oct 1, 2007 | 6,466.80 | 6,751.70 | 6,413.40 | 6,721.60 | 1,876,738,600 | 6,721.60 | Sep 3, 2007 | 6,303.30 | 6,512.40 | 6,123.10 | 6,466.80 | 1,893,980,400 | 6,466.80 | Aug 1, 2007 | 6,360.10 | 6,406.30 | 5,821.70 | 6,303.30 | 1,812,830,100 | 6,303.30 | Jul 2, 2007 | 6,607.90 | 6,754.10 | 6,186.20 | 6,360.10 | 1,846,057,500 | 6,360.10 | Jun 1, 2007 | 6,621.40 | 6,751.30 | 6,451.40 | 6,607.90 | 1,982,709,100 | 6,607.90 | May 1, 2007 | 6,449.20 | 6,675.00 | 6,395.50 | 6,621.40 | 2,005,402,100 | 6,621.40 | Apr 2, 2007 | 6,308.00 | 6,516.20 | 6,293.90 | 6,449.20 | 1,733,620,500 | 6,449.20 | Mar 1, 2007 | 6,171.50 | 6,355.30 | 5,989.60 | 6,308.00 | 1,937,028,700 | 6,308.00 | Feb 1, 2007 | 6,203.10 | 6,451.40 | 6,166.20 | 6,171.50 | 1,763,028,400 | 6,171.50 | Jan 2, 2007 | 6,220.80 | 6,335.10 | 6,130.20 | 6,203.10 | 1,774,774,900 | 6,203.10 | Dec 1, 2006 | 6,048.80 | 6,271.40 | 5,985.20 | 6,220.80 | 1,366,647,500 | 6,220.80 | Nov 1, 2006 | 6,129.20 | 6,256.80 | 6,011.80 | 6,048.80 | 1,690,671,800 | 6,048.80 | Oct 2, 2006 | 5,960.80 | 6,244.60 | 5,897.30 | 6,129.20 | 1,661,140,200 | 6,129.20 | Sep 1, 2006 | 5,906.10 | 6,002.90 | 5,774.50 | 5,960.80 | 1,593,479,500 | 5,960.80 | Aug 1, 2006 | 5,928.30 | 5,949.80 | 5,752.60 | 5,906.10 | 1,416,730,100 | 5,906.10 | Jul 3, 2006 | 5,833.40 | 5,982.50 | 5,654.60 | 5,928.30 | 1,403,843,000 | 5,928.30 | Jun 1, 2006 | 5,723.80 | 5,865.70 | 5,467.40 | 5,833.40 | 1,709,102,100 | 5,833.40 | May 2, 2006 | 6,023.10 | 6,133.50 | 5,510.50 | 5,723.80 | 2,008,162,400 | 5,723.80 | Apr 3, 2006 | 5,964.60 | 6,137.10 | 5,964.60 | 6,023.10 | 1,801,112,900 | 6,023.10 | Mar 1, 2006 | 5,791.50 | 6,047.00 | 5,783.90 | 5,964.60 | 1,991,586,200 | 5,964.60 | Feb 1, 2006 | 5,760.30 | 5,893.30 | 5,681.90 | 5,791.50 | 1,974,727,800 | 5,791.50 | Jan 3, 2006 | 5,618.80 | 5,796.10 | 5,618.80 | 5,760.30 | 1,966,761,500 | 5,760.30 | Dec 1, 2005 | 5,423.20 | 5,647.20 | 5,423.20 | 5,618.80 | 1,463,333,100 | 5,618.80 | Nov 1, 2005 | 5,317.30 | 5,554.90 | 5,304.90 | 5,423.20 | 1,868,493,800 | 5,423.20 | Oct 3, 2005 | 5,477.70 | 5,515.00 | 5,130.90 | 5,317.30 | 1,739,025,000 | 5,317.30 | Sep 1, 2005 | 5,296.90 | 5,508.40 | 5,296.90 | 5,477.70 | 1,553,471,300 | 5,477.70 | Aug 1, 2005 | 5,282.30 | 5,386.40 | 5,228.10 | 5,296.90 | 1,359,418,800 | 5,296.90 | Jul 1, 2005 | 5,113.20 | 5,308.60 | 5,022.10 | 5,282.30 | 1,791,884,100 | 5,282.30 | Jun 1, 2005 | 4,964.00 | 5,138.20 | 4,964.00 | 5,113.20 | 1,585,016,100 | 5,113.20 | May 3, 2005 | 4,801.70 | 5,004.30 | 4,801.70 | 4,964.00 | 1,613,726,200 | 4,964.00 | Apr 1, 2005 | 4,894.40 | 4,994.10 | 4,773.70 | 4,801.70 | 1,626,241,100 | 4,801.70 | Mar 1, 2005 | 4,968.50 | 5,042.00 | 4,886.50 | 4,894.40 | 1,736,076,300 | 4,894.40 | Feb 1, 2005 | 4,852.30 | 5,077.80 | 4,852.30 | 4,968.50 | 1,740,831,400 | 4,968.50 | Jan 4, 2005 | 4,814.30 | 4,879.50 | 4,765.40 | 4,852.30 | 1,640,281,900 | 4,852.30 | Dec 1, 2004 | 4,703.20 | 4,826.20 | 4,675.00 | 4,814.30 | 1,362,204,300 | 4,814.30 | Nov 1, 2004 | 4,624.20 | 4,823.80 | 4,624.20 | 4,703.20 | 1,612,545,100 | 4,703.20 | * BOND RATES FOR UK COMPANIES UK benchmark yields Maturity | Yield | Today's change | 1 week ago | 1 month ago | 1 Month | 0.54% | 0.00 | 0.54% | 0.55% | 3 Month | 0.54% | 0.00 | 0.55% | 0.55% | 6 Month | 0.55% | 0.00 | 0.56% | 0.56% | 1 Year | 0.47% | -0.01 | 0.56% | 0.63% | 2 Year | 0.48% | -0.01 | 0.55% | 0.62% | 3 Year | 0.64% | -0.03 | 0.67% | 0.85% | 4 Year | 0.84% | -0.03 | 0.90% | 1.09% | 5 Year | 1.11% | -0.03 | 1.17% | 1.37% | 7 Year | 1.53% | -0.03 | 1.57% | 1.76% | 8 Year | 1.91% | -0.03 | 1.92% | 2.14% | 9 Year | 2.08% | -0.04 | 2.14% | 2.34% | 10 Year | 2.24% | -0.03 | 2.28% | 2.47% | 15 Year | 2.56% | -0.04 | 2.60% | 2.76% | 20 Year | 3.00% | -0.03 | 3.06% | 3.20% | 30 Year | 3.18% | -0.03 | 3.27% | 3.39% | * BIBLIOGRAPHY - REFERENCE 1. HSBC Holdings Plc., http://en.wikipedia.org/wiki/HSBC 2. FTSE 100 Index, http://en.wikipedia.org/wiki/FTSE_100 3. FTSE Group, http://en.wikipedia.org/wiki/FTSE_Group 4. UK Government Bonds http://markets.ft.com/research/Markets/Bonds 5. Brealey, R. A., Myers, S. C., and Allen, F., ‘Principles of Corporate Finance’, 10th edition, McGraw Hill, 2011 6. Stephen A. Ross, Randolph W. Westerfield and Jeffrey F. Jaffe (1999), Non Experimental Research, Part 1: Observational Archival and Case Study Research 7. Ben McClure, ‘The Capital Asset Pricing Model : An Overview’, 2010, http://www.investopedia.com/articles/06/CAPM.asp#ixzz1ed40Buwe 8. Fischer Black, Michael C. Jensen, Myron Scholes, ‘The Capital Asset Pricing Model : Some empirical Tests’, New York, 1972 9. Fama, Eugene F. and James D. MacBeth, ‘Risk, Return, and Equilibrium: Empirical Tests : The Journal of Political Economy’, 1973 10. 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The above estimation of WACC requires the calculations of its three components: the cost of equity, the after-tax cost of debt and the firm’s target capital structure. Since changes in these above anticipated uses may affect the corporate target capital structure, various uses of WACC in corporate operations may relatively generate different results of WACC. III. ESTIMATION OF MIDLAND CORPORATE WACC: 1. Cost of Equity: It reflects the risk of cash flows to common equity holders who are the residual claimants of the firm’s earning. As the expected rate of return on a company’s stock is unobservable, thus the estimation has to rely on asset... Words: 1267 - Pages: 6 Premium Essay #### Boeing 777 Case Solution ...was targeted to service routes in a critical high growth market segment. The chief objective of the analysis is to evaluate the 777 against a financial standard. The case gives internal rates of return (IRRs) for the 777 project base case and alternative forecasts. The principal analytical problem of the case is an estimation of a weighted average cost of capital (WACC) for Boeing’s commercial aircraft division in order to evaluate these IRRs. The analysis should also identify ‘key value drivers’ and distinguish, on a qualitative basis, the key gambles Boeing is making. Capital budgeting projects should promote the primary goal of the firm; therefore, the primary goal directs decision making. Frank Shrontz, Boeing’s CEO, says his mission is raising Boeing’s return on equity from the recent average of about 12 percent. Is the primary goal of Boeing improving return on equity? 1. Frank Shrontz says he wants to improve Boeing’s return on equity. How might the 777 project serve that mission? Is improving return on equity the same as maximizing shareholders’ wealth? 2. Boeing has historically shown an aversion to debt financing with the book value of debt making up only 4 percent of total capital (page 201). Is this low leverage consistent with the goal of increasing return on equity? 3. Can we assume that Boeing’s primary goal is maximizing shareholders’ wealth? Your decision on the Boeing 777 will be in the context of the... Words: 4444 - Pages: 18 Premium Essay #### Acoounting Policy ...selected, this report is to provide the reasons why Network I is better. Before finalize the decision to select between Network I and Network II, there are three steps: 1. The forecasted net cash flow derived for both Network 2. Techniques use to evaluate Networks 3. Final decision to accept Network I 1. Forecasting cash flow for both Networks As attached in Appendix I, to get free cash flow for these two projects, there are 3 stages: 2.1 Calculation of Cost of capital “Capital asset pricing model (CAPM) gives a condition under which we can generalize about the structure of expected return of a share in market” (Benninga 2008, p. 319). We use this discount rate to calculate the net present value of the projects. The formula is E (ri) = rf + E(rm – rf) i = 18.66% Where E (ri): required return on the equity of stock i E(rm – rf): expected return on the market over and above the risk-free rate rf: risk-free rate 2.2 Profit calculation Before calculating of cash flow forecasts, incremental profit before tax should be derived first. Incremental profit before tax is defined as revenue less operating expense and depreciation, but plus opportunity cost from not paying the fee to Commonwealth Bank if the Capital Bank switches to either Network I or II. 2.3 Cash flow calculation The remaining cash flows include initial investment on ATM and installation cost, the changes in working capital, the final recovery of salvage value, taxation... Words: 2271 - Pages: 10 Premium Essay #### Heinz ...period, the price fluctuated from$47 at FYE 2008, down to $34 at FYE 2009 and back up to$47 at FYE 2010. Accordingly, Heinz was considering whether or not to adjust their cost of capital to reflect these changes as they occurred. This gives rise to two questions: To what degree should these stock price changes affect cost of capital? How often should the cost of capital be re-estimated? To address these questions, we first estimated Heinz’s WACC at the time under the given market conditions In order to prepare our estimation for the WACC, we first made educated assumptions for the variable inputs of the WACC equation. Our assumptions and source behind each are as follows: Table 1: The assumptions and corresponding source, used in the Heinz WACC estimation Assumption Source Risk Free Rate: 4.5 % Based on the 30-year Treasury Yield as of April 2010 (Exhibit 3 of case) Market Risk Premium: 7.5% Based on long-term estimates (case, page 5) Beta: 0.62 Based on 5 year average (case, page 5) Cost of Equity: 9.18% Calculated using CAPM and above data Cost of Debt: 3.16% Calculated using bond data (Exhibit 3) Value of Equity: $14,890,130,300 Calculated based on share price of$46.87, multiplied by outstanding shares of 317.69 million (Exhibit 2) Value of Debt: 4,559,152 In lieu of a market value, the book value of...

Words: 2250 - Pages: 9

#### Event Study of Stock Splits

...Institute of Management, Lucknow Contents Data 3 Sample 3 Methodology 4 Alpha and Beta Estimation 4 Event Study 4 Hypothesis & Objective 5 Testing & Results 5 Alpha and Beta calculation 5 Event Study 6 Stock Split 7 Reverse Stock Split 8 Conclusion 8 Data 1. This study includes samples of 19 companies that made a stock split announcements and 9 companies that made a reverse stock split announcements. All the companies were listed on BSE. 2. Data for daily stock prices and closing BSE 500 index for this study was collected from http://finance.yahoo.com/. Sample The below tables show the sample companies selected for the event study. Companies selected for stock Split announcements Companies selected for reverse stock split announcements Methodology The event period was decided as -60 to 60 with the announcement date falling on day 0. Alpha and Beta Estimation 1. Alpha and beta was estimated for each company by regressing daily stock returns with index return. 2. The estimation was a done for a 250 day period prior to -60. This period was selected to minimize any noise that could arise due to the announcement of stock split/reverse stock split. 3. Actual return was calculated for all the companies as well as for the BSE 500 during the 250 day period. Actual return was obtained from the following formula: Daily Return = (current day adj close price – previous day adj close price) / prev. Day adj close price ...

Words: 932 - Pages: 4

#### Boeing 7e7

...Dividing $5,023.28M by$14,591.43M (sum of market value of debt plus the market value of equity) and multiplying by 100 gives the percent debt of 34.43%. Please see Exhibit 1 for calculations. The pretax cost of debt capital will be the yield to maturity of a proxy bond. The bond that matures on 2/15/2013 will be used as a proxy for the entire cost of debt capital because of its relative size in relation to the entire company’s debt capital. Additionally, the maturity date most closely matches when the largest amount of cash inflows will be needed by Boeing. The yield to maturity of this bond is 4.657%. Though the marginal effective tax rate is listed as 35% in cash flow estimations from the case, this is seems like too aggressive of a number. Instead, the tax rate I will use in estimations will be 27.1%. The...

Words: 1076 - Pages: 5

Free Essay

#### Beta Instabililty

...has a slight bias towards large companies. From 2000 to 2012, the daily data on closing prices of the stocks and the KSE100 index were obtained from the Karachi Stock Exchange Data Portal, which is the primary source of all stock data in the country. Monthly stock returns for each stock are calculated using this data. Monthly market returns were calculated from the broadly-based, capitalization weighted KSE 100 index as the KSE 100 Index was taken as the market portfolio. The three months treasury-bill rate was used as risk-free rate. The data on six-month treasury-bill rates was obtained from the Market Treasury Bills Auction Results from the State Bank of Pakistan data Portal. Methodology- Betas are estimated using the single period, discrete time Market Model (MM) developed by Markowitz (1959) Shape (1963).The MM is expressed as, Rit = αit + βiRmt + εit, -----------------(1) Where Rit is the expected return on an asset “,i”, Rmt is expected return on market portfolio, proxied by the stock market index and βi is the “beta” or the measure of risk or market sensitivity parameter. Rit is measured as the continuously compounded return on the i'th security during time t, while Rmt is the corresponding return on the market. In equation 1, α and β are unknown firm specific parameters assumed to be constant over time,...

Words: 720 - Pages: 3

Free Essay

#### Investment

...The first problem we faced in calculating the expected returns was whether or not to used a historical average or calculate beta and apply the CAPM. We decided to find beta and calculate the CAPM. The reasoning is that our investor is interested in forecasting future returns. Even though beta is theoretical and largely inaccurate, it is the best tool available to the analyst. To calculate beta we considered three methods. The first was to look up historical betas for each of the assets. We used Yahoo Finance. The second method was to use the formula; CovRm, RiVarRi and apply it to each of the funds. Lastly, we regressed the monthly returns of each of the assets with the monthly market risk premium to estimate beta (see exhibit 1). For our purposes we valued the covariance formula and the regression analysis more than historical data since we are more interested in forecasting. The output for these methods returned almost identical results for every fund so we used the average of the two as our estimated beta. There were three exceptions – the last three assets (TIDRX, TIKRX, and TIQRX). We felt that there might not have been a large enough sample set to get an accurate result from the same type of analysis, so we defaulted to the historical figures calculated by Yahoo Finance for these three assets. Next, we considered alpha. We strongly feel that markets are efficient and any estimation of alpha for use to identify under or overvalued assets – in essence...

Words: 471 - Pages: 2

...ft Beta Estimation Practice And Its Reliability Biasness Towards Aggressive Stocks: An Empirical Evidence From NSE * Dr. Neeraj Sanghi ** Dr. Gaurav Bansal INTRODUCTION While investing in a capital market, investors always have concern about the market movements or changes in the value of capital market index. This tendency of investors' behavior is related to a psychological factor that reveals that market movements and prices of stocks are closely related to each other. Upward / downward movement in market index gives trigger to the expectation of investors that the value of their holding would move accordingly. This is, more formally, known as systematic risk arising on account of economic wide uncertainties and explains the tendency of stock's price movement together with changes in market index. Systematic risk, also known as market risk, cannot be reduced through diversification of stocks' portfolio. Investors arc exposed to market risk even when they hold well diversified portfolio of securities. In finance literature, beta coefficient is a measurement statistic of systematic risk; it refers to the slope in a linear relationship fitted to data on the rate of return on a stoek and Ihc rate of return of the market (or market index). This usage stems from Sharpe's 1963 paper in Management Science. Beta is the stock's sensitivity to the market index: it is the degree (in percentage) by which the stock's relum lends to increase or decrease for every 1% increase or decrease...

Words: 4344 - Pages: 18

#### Schulman, Inc

...paper, I will continue to work on A. Schulman, Inc (SHLM) along with its two biggest competitors PolyOne Corporation (POL) and Dow Chemical (DOW). Rate Of Return To calculate the rate of return for each of the firms for last three years, I used the adjusted yearly close price, which includes dividends and splits. ( please refer to Appendix I ). Clearly, the three companies were hurt by the financial crises. Especially in 2008, they all had losses. However, Schulman had lost the least compared to PolyOne, which was the biggest loser. After 2008 all three companies adjusted their position and gained profits. You can notice that PolyOne which recorded the highest losses in 2008, gained the highest returns in 2009 compared to the Dow and Schulman that had the least profits. In 2010, the three companies continued to earn profit but with a weaker momentum. Expected rate of return In order to estimate the rate of return for the following year, I have estimated the probability of having strong, normal, and weak demand. Since I believe that the market characteristics have somehow changed after the financial crises, I’ve based my estimates for the rate of return on the last 10 years with some adjustments to make it more related to after the recession period. (Refer to Appendix II) In my estimation of the expected rate of return, the three companies will slightly continue to grow profit. Of course that depends on how long it is going to take for the oil prices to drop, due to the action...

Words: 889 - Pages: 4

#### Financial Accounting Theory

...Financial Accounting Theory Test 1: 1) Please briefly describe the essences of the following cases of accounting scandal or earnings management. (20 points) A) ENRON (8 points) * Enron created many special purpose entities (SPEs) controlled by senior Enron officers that they used in conducting off balance sheet financing * SPE’s borrowed money from banks using Enron’s stock as collateral However all of the liability was reported on the SPE’s books, not on Enron’s, even though the borrowed cash went to Enron * Thus investors had no idea of Enron’s debt because they did not consolidate the SPE’s like they were suppose to under GAAP * Enron also charged fees for management and other services supplied to their SPE’s and included appreciation of its own stock which exaggerated net income * They had to consolidate their financials resulting in a reduction of shareholder’s equity, restatement of previous 4 years earnings, loss of investor confidence, share price fell from $90 to 66 cents then 1 cent * The SEC revoked the auditing license of accounting firm they used, Arthur Anderson B) MCI WORLDCOM (8 points) * From 1999-2002 they overstated their earnings by$11 billion * $4 billion of this amount was from capitalization of network maintenance and other costs that should have been expensed * and$3.3 billion came from reductions in the allowance for doubtful accounts * WorldCom’s merger with MCI was a disaster and went bankrupt...

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#### Paper Paper

...Estimate Risk-Free Rate ii. Estimate Risk Premium iii. Estimate Beta * Unlevered beta: the beta a company would have if it were all equity financed * CAPM: beta estimated relative to market portfolio * APM / Multi-factor: betas relative to each factor have to be measured. There are 3 estimation approaches: * Historical market betas (most used): regressing stock returns against market returns. Analysts often obtain these from estimation services. * Fundamental betas (bottom-up): betas determined by (i) type of businesses the firm in is, (ii) degree of operating leverage (fixed costs relative to total costs), (iii) firm’s financial leverage. * Accounting betas: look at changes in the firms’ earnings vs. changes in earnings for the market. * For private firms, may have to estimate betas using comparable publicly traded firms. * Estimating the cost of equity * Cost of equity is the return shareholders expect to make. If firms don’t deliver this, the SHs become restive and rebellious. * CAPM: Expected return = riskfree rate + beta * expected risk premium * Cost of equity is usually much higher than the cost of debt Cost of Capital * Weighted average of the costs of the different components of financing: debt, equity, hybrid securities. 3 evaluation approaches: * Unlevered cost of equity approach: cost of equity using an unlevered beta. *...

Words: 715 - Pages: 3

#### Dgjdgjdf

...For other uses, see Beta. In finance, the beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole.[1] An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa.[2] The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index. Contents [hide] * 1 Definition o 1.1 Securities market line * 2 Beta volatility and correlation * 3 Choice of benchmark * 4 Investing * 5 Academic theory * 6 Multiple beta model * 7 Estimation of beta * 8 Extreme and interesting cases * 9 Criticism * 10 See also * 11 Notes * 12 External links  Definition The formula for the beta of an asset within a portfolio is \beta_a = \frac {\mathrm{Cov}(r_a,r_p)}{\mathrm{Var}(r_p)} , where ra measures the rate of return of the asset, rp measures the...

Words: 2667 - Pages: 11

#### Food Industry

...BRIEF INFORMATION ABOUT MIDLAND ENERGY RESOURCES Midland Energy Resources was a global energy company with operations in oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. It had been incorporated more than 120 years and had more than 80,000 employees in 2007. Its consolidated operating revenue, operating income and total assets were $248.5 billion,$42.2 billion and \$262.4 billion respectively in 2006. Midland’s E&P division operated in all parts of exploration, development, and production of which production was the dominant operation according to operating results reported in 2006. Also E&P is the most profitable division of Midland. On the other hand, R&M is the largest division in terms of revenue. Midland had ownership interests in 40 refineries all over the world. In the field of this division, there was stiff competition. Midland’s technology is advanced and with the vertical integration it makes Midland market leader in this business. The smallest division of Midland is petrochemicals. Midland’s financial and investment strategies for 2007 was built on four pillars, which are to fund overseas growth, to invest in value-creating project across all divisions, to optimize its capital structure, and to repurchase undervalued shares. Midland used estimates of cost of capitals in many analyses such as asset appraisals for both capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase...